EX-99.1 2 d208500dex991.htm EX-99.1 EX-99.1
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Exhibit 99.1

                        , 2016

Dear Xerox Shareholder,

On January 29, 2016, Xerox announced plans to separate into two independent, publicly traded companies: one consisting of our business process outsourcing business, which will be named Conduent Incorporated, the other comprising our Document Technology and Document Outsourcing businesses and retaining the Xerox Corporation name.

Our decision to separate followed a comprehensive review of the company’s business portfolio and capital structure that was initiated by Xerox’s Board of Directors in October 2015 with the goal of identifying opportunities to enhance shareholder value. We concluded that separating the businesses is the best path forward for Xerox.

The separation will create two Fortune 500-scale companies, each a global leader in its respective market. As standalone companies, Xerox and Conduent will benefit from simplified organizational structures, enhanced strategic focus and financial flexibility. The companies will be established with business strategies, and organizational and capital structures aligned to their distinct goals and growth opportunities. We also expect each will continue to reap the benefits of the three-year strategic transformation program Xerox launched earlier this year to deliver increased cost efficiency, agility and competitiveness for each company.

Conduent will be a leading provider of business process services with expertise in transaction-intensive processing, analytics and automation. The company will deliver industry-specific service offerings in attractive growth markets such as healthcare and transportation and multi-industry service offerings in transaction processing, customer care and payment services, among others. Through sharpened portfolio focus, operational discipline, and investments in its business, we expect Conduent will create sustainable value for shareholders by driving margin expansion and profitable growth in an industry that is growing in the mid-single digits.

Following the separation, Xerox will continue to capitalize on its long-standing industry leadership positions through operational excellence, cost discipline, leading technology and innovation. It will continue to help clients improve productivity, workflow and business performance through its deep understanding of how, why and where people work. Xerox will be well positioned to build on its core businesses and pursue select growth opportunities, supported by its access to capital and strong cash flows.

The separation will provide current Xerox shareholders with equity ownership in both the new Xerox and Conduent and is intended to be tax-free to Xerox shareholders for U.S. Federal income tax purposes. Completion of the separation is subject to customary conditions.

I encourage you to read the attached information statement which has been filed with the U.S. Securities and Exchange Commission. The information statement describes the separation in detail, including information on the distribution of Conduent stock as well as important business and financial information about the new company.

The Xerox board and I believe the separation presents significant value-creation opportunities for Xerox and Conduent shareholders. We thank you for your continued support of our company and remain committed to creating long-term value for shareholders of both companies.

Sincerely,

Ursula M. Burns

Chairman of the Board and Chief Executive Officer

Xerox Corporation


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                        , 2016

Dear Future Conduent Shareholder,

It is my pleasure to welcome you as a future stockholder of our new company, Conduent Incorporated, where I will serve as chief executive officer and a member of the Board of Directors.

Conduent, which will be made up of the business process services division of Xerox, is a long-standing market leader with expertise in automation, analytics, and transaction processing. In 2015, the business generated $6.7 billion in total revenue through an exceptional team of 96,000 employees globally.

During the past several years, Xerox has focused its portfolio on a variety of businesses, geographies and capabilities. As an independent company, we will build on our strengths in priority markets with an intensified focus on operational discipline, cost management and innovation.

The Conduent team is excited to embark on this journey and to create a new company. One that is built on a strong foundation of core values, an unwavering focus on our clients, delivery excellence and differentiated, best-in-class solutions. We’re committed to delivering sustainable, consistent and improving returns to all of our stakeholders—clients, employees, shareholders and society at large.

I encourage you to read the attached information statement to learn more about Conduent, its business and strategy. We look forward to earning your continued support.

Sincerely,

Ashok Vemuri

Chief Executive Officer, Xerox Business Services

Xerox Corporation


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Information contained herein is subject to completion or amendment. A Registration Statement on Form 10 relating to these securities has been filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended.

SUBJECT TO COMPLETION, DATED NOVEMBER 7, 2016

INFORMATION STATEMENT

Conduent Incorporated

233 Mount Airy Road, Suite 100

Basking Ridge, New Jersey 07920

Common Stock

(par value $0.01)

 

 

We are sending you this Information Statement in connection with the spin-off by Xerox Corporation, or “Xerox,” of its wholly owned subsidiary, Conduent Incorporated, or “Conduent.” To effect the spin-off, Xerox will distribute all of the shares of Conduent common stock on a pro rata basis to the holders of Xerox common stock. We expect that the distribution of Conduent common stock will be tax-free to holders of Xerox common stock for U.S. federal income tax purposes, except for cash that shareholders receive in lieu of fractional shares.

If you are a record holder of Xerox common stock as of the close of business on December 15, 2016, which is the record date for the distribution, you will be entitled to receive one share of Conduent common stock for every five shares of Xerox common stock you hold on that date. Xerox will distribute the shares of Conduent common stock in book-entry form, which means that we will not issue physical stock certificates. The distribution agent will not distribute any fractional shares of Conduent common stock. Instead, the distribution agent will aggregate fractional shares into whole shares, sell the whole shares in the open market at prevailing market prices and distribute the aggregate cash proceeds of the sales, net of brokerage fees and other costs, pro rata to each holder (net of any required withholding for taxes applicable to each holder) who would otherwise have been entitled to receive a fractional share in the distribution.

The distribution will be effective as of 11:59 p.m., New York City time, on December 31, 2016. Immediately after the distribution becomes effective, Conduent will be an independent, publicly traded company.

Xerox’s shareholders are not required to vote on or take any other action to approve the spin-off. We are not asking you for a proxy and request that you do not send us a proxy. Xerox shareholders will not be required to pay any consideration for the shares of Conduent common stock they receive in the spin-off, and they will not be required to surrender or exchange their shares of Xerox common stock or take any other action in connection with the spin-off.

Xerox currently owns all of the outstanding shares of Conduent common stock. Accordingly, no trading market for Conduent common stock currently exists. We expect, however, that a limited trading market for Conduent common stock, commonly known as a “when-issued” trading market, will develop as early as two trading days prior to the record date for the distribution, and we expect “regular-way” trading of Conduent common stock will begin on the first trading day after the distribution date. We intend to list Conduent common stock on the New York Stock Exchange under the symbol “CNDT.”

 

 

In reviewing this Information Statement, you should carefully consider the matters described in the section entitled “Risk Factors” beginning on page 15 of this Information Statement.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved these securities or determined if this Information Statement is truthful or complete. Any representation to the contrary is a criminal offense.

This Information Statement is not an offer to sell, or a solicitation of an offer to buy, any securities.

The date of this Information Statement is                    , 2016.


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TABLE OF CONTENTS

 

     Page  

INDUSTRY AND MARKET DATA

     1   

TRADEMARKS AND COPYRIGHTS

     1   

SUMMARY

     2   

RISK FACTORS

     15   

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

     32   

THE SPIN-OFF

     33   

DIVIDEND POLICY

     43   

CAPITALIZATION

     44   

SELECTED HISTORICAL FINANCIAL DATA

     45   

UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS

     46   

BUSINESS

     55   

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     71   

MANAGEMENT

     109   

COMPENSATION DISCUSSION AND ANALYSIS

     119   

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     162   

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     165   

DESCRIPTION OF OUR CAPITAL STOCK

     170   

WHERE YOU CAN FIND MORE INFORMATION

     177   

INDEX TO FINANCIAL STATEMENTS

     F-1   

 

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INDUSTRY AND MARKET DATA

This Information Statement includes information concerning our industry and the markets in which we operate that is based on information from public filings, internal company sources, various third-party sources and management estimates. We have also included information derived from market research and industry modeling that was conducted by third-party research organizations at our request not in connection with this Information Statement. Management estimates are derived from publicly available information released by independent industry and research analysts and third-party sources, as well as data from our internal research and information from commissioned third-party research not in connection with this Information Statement, and are based on assumptions made by us upon reviewing such data and our knowledge of such industry and markets, which we believe to be reasonable. While we are not aware of any misstatements regarding any industry data presented in this Information Statement and believe such data are accurate, we have not independently verified any data obtained from third-party sources and cannot assure you of the accuracy or completeness of such data. Such data involve uncertainties and are subject to change based on various factors.

TRADEMARKS AND COPYRIGHTS

We own or have rights to various trademarks, logos, service marks and trade names that we use in connection with the operation of our business. We also own or have the rights to copyrights that protect the content of our products. Solely for convenience, the trademarks, service marks, trade names and copyrights referred to in this Information Statement are listed without the ™, ® or © symbols, but such references do not constitute a waiver of any rights that might be associated with the respective trademarks, service marks, trade names and copyrights included or referred to in this Information Statement.

 

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SUMMARY

This summary highlights selected information from this Information Statement and provides an overview of our company, our separation from Xerox and Xerox’s distribution of our common stock to its shareholders. For a more complete understanding of our business and the Spin-Off (as defined below), you should read this entire Information Statement carefully, particularly the discussion of “Risk Factors” beginning on page 15 of this Information Statement, and our historical and pro forma financial statements and the notes to those financial statements appearing elsewhere in this Information Statement.

Prior to Xerox’s distribution of the shares of our common stock to its shareholders, Xerox will undertake a series of internal transactions, following which Conduent will hold, directly or through its subsidiaries, the businesses constituting Xerox’s business process outsourcing business and related operations, which we refer to as the “BPO Business.” We refer to this series of internal transactions, which is described in more detail under “Certain Relationships and Related Party Transactions—Agreements with Xerox—Separation and Distribution Agreement,” as the “Internal Transactions.”

In this Information Statement, unless the context otherwise requires:

 

    “Conduent,” “we,” “our” and “us” refer to Conduent Incorporated and its consolidated subsidiaries after giving effect to the Spin-Off, and

 

    “Xerox” refers to Xerox Corporation and its consolidated subsidiaries other than, for all periods following the Spin-Off, Conduent.

The transaction in which Xerox will distribute to its shareholders all of the shares of our common stock is referred to in this Information Statement as the “Distribution.” The transaction in which we will be separated from Xerox is sometimes referred to in this Information Statement as the “Spin-Off.”

Our Company

Conduent is a leading provider of business process services with expertise in transaction-intensive processing, analytics and automation. We serve as a trusted business partner in both the front office and back office, enabling personalized, seamless interactions on a massive scale that improve end-user experiences.

We create value for our commercial and government clients by applying our expertise, technology and innovation to help them drive customer and constituent satisfaction and loyalty, increase process efficiency and respond rapidly to changing market dynamics.

Our portfolio includes industry-focused service offerings in attractive growth markets such as healthcare and transportation, as well as multi-industry service offerings such as transaction processing, customer care and payment services.

We believe our addressable market size in the global business process service industry is estimated at nearly $260 billion in 2016, with expected growth rates in the mid-single digits through 2019. We have leadership positions in key market segments, including healthcare and transportation, which are expected to grow at 8% and 5% on a compounded annual basis through 2019, respectively. In addition, we are well positioned to capitalize on key industry trends such as increased demand for productivity, automation, personalization and innovation to capture growth.

Our strategy is to drive portfolio focus, operational discipline, sales and delivery excellence and innovation, complemented by tightly aligned investments. As a result, we aim to generate sustainable value for our shareholders by delivering profitable growth and margin expansion and deploying a disciplined capital allocation strategy.

 



 

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With approximately 93,700 employees globally, we provide differentiated services to clients spanning small, medium and large businesses and to governments of all sizes in 42 countries. In 2015, we generated $6,662 million in total revenues, 90% of which was recurring.

Competitive Strengths

Our competitive strengths include the following:

 

    Leadership in business process services driven by deep expertise, strong client relationships and differentiated solutions in attractive growth industries, including healthcare and transportation;

 

    Expertise in managing transaction-intensive, end-user driven processes on a large scale through our differentiated suite of high quality multi-industry service offerings;

 

    Ability to deliver our proprietary technology, differentiated service offerings and service capabilities expertly to clients around the world;

 

    Ability to help clients drive lower costs, higher quality and increased end-user satisfaction through our continuous investment in innovation and development of new technologies and capabilities that improve business processes; and

 

    A loyal, diverse client base that supports our stable recurring revenue model and high renewal rates.

Strategic Overview

Our business strategies include the following:

Expand within attractive industries. The industries in which we operate have attractive revenue growth rates, generally in the mid-single digits. We intend to sharpen our focus and expand our business in industries with strong growth and profitability characteristics. We will employ a disciplined approach to portfolio management to complement our competitive strengths and build depth and breadth in our core businesses.

Optimize and strengthen our services capabilities. We plan to optimize our services capabilities and strengthen several core areas, including transaction processing, customer care and prepaid card services by building out our service offerings and continuing to improve our competitive strengths.

Drive operational and delivery excellence. We intend to improve our margins through an ongoing focus on operational and delivery excellence and cost efficiency. We plan to drive operational excellence through further automation and standardization of internal processes and with a continued focus on providing quality services.

Continue to advance next-generation platforms and capabilities. We intend to maintain our focus on innovation to create next-generation solutions aligned with our clients’ future needs and our growth strategies. We plan to advance our current platforms, further automate and personalize business processes and enhance data analytics capabilities to deliver value-added services for our clients.

Engage, develop and support our people. We intend to continue to develop our employees by investing in training, processes and systems to equip them with modern tools that enable them to perform their jobs more efficiently. Further, we plan to strengthen our sales teams with improved and optimized coverage and effective talent management.

Conduent Debt

In connection with the Spin-Off, we expect to incur additional borrowings in order to redistribute debt between us and Xerox, such that we will have a total principal amount of debt of approximately $2,250 million immediately following the separation (consisting of approximately $2,200 million of new borrowings plus approximately $50 million of existing debt). It is currently anticipated that this indebtedness will consist of secured term loans or senior unsecured notes, or a combination of the foregoing. Approximately $1,905 million of the proceeds of the new borrowings will be transferred to Xerox prior to the consummation of the Spin-Off.

 



 

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Other Information

We are a New York corporation. Our principal executive offices are located at 233 Mount Airy Road, Suite 100, Basking Ridge, NJ 07920. Our telephone number is (908) 758-1200. Our website address is www.conduent.com. Information contained on, or connected to, our website or Xerox’s website does not and will not constitute part of this Information Statement or the Registration Statement on Form 10 of which this Information Statement is a part.

 



 

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The Spin-Off

Overview

On January 29, 2016, Xerox announced plans for the complete legal and structural separation of Conduent from Xerox.

To effect the separation, first, Xerox will undertake the series of internal transactions described under “Certain Relationships and Related Party Transactions—Agreements with Xerox—Separation and Distribution Agreement,” or the “Internal Transactions.” Xerox will subsequently distribute all of our common stock to Xerox’s shareholders, and Conduent, holding the BPO Business, will become an independent, publicly traded company.

Prior to completion of the Spin-Off, we intend to enter into a Separation and Distribution Agreement and several other agreements with Xerox related to the Spin-Off. These agreements will govern the relationship between Xerox and us up to and after completion of the Spin-Off and allocate between Xerox and us various assets, liabilities and obligations, including employee benefits, intellectual property and tax-related assets and liabilities. See “Certain Relationships and Related Party Transactions” for more detail.

Completion of the Spin-Off is subject to the satisfaction or waiver of a number of conditions. In addition, Xerox has the right not to complete the Spin-Off if, at any time, Xerox’s board of directors, or the “Xerox Board,” determines, in its sole and absolute discretion, that the Spin-Off is not in the best interests of Xerox or its shareholders, or is otherwise not advisable. See “The Spin-Off—Conditions to the Spin-Off” for more detail.

Questions and Answers about the Spin-Off

The following provides only a summary of the terms of the Spin-Off. You should read the section entitled “The Spin-Off” below in this Information Statement for a more detailed description of the matters described below.

 

Q: What is the Spin-Off?

A: The Spin-Off is the method by which we will separate from Xerox. In the Spin-Off, Xerox will distribute to its shareholders all the outstanding shares of our common stock. Following the Spin-Off, we will be an independent, publicly traded company, and Xerox will not retain any ownership interest in us.

 

Q: Will the number of Xerox shares I own change as a result of the Spin-Off?

A: No, the number of shares of Xerox common stock you own will not change as a result of the Spin-Off.

 

Q: What are the reasons for the Spin-Off?

A: The Xerox Board considered the following potential benefits in deciding to pursue the Spin-Off:

 

    Enhanced Strategic and Operational Focus. Following the Spin-Off, Xerox and Conduent will each have a more focused business and be better able to dedicate financial, management and other resources to leverage its areas of strength and differentiation. Each company will pursue appropriate growth opportunities and execute strategic plans best suited to address the distinct market trends and opportunities for its business. Conduent plans to focus on leadership in attractive market segments, invest selectively in growth areas, ensure continued operational discipline and capture transformative productivity.

 

   

Simplified Organizational Structure and Resources. The Spin-Off will allow the management of each of Xerox and Conduent to devote its time and attention to the development and implementation of corporate strategies and policies that are based primarily on the specific business characteristics of their

 



 

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respective companies. Each company will be able to adapt faster to clients’ changing needs, address specific market dynamics, target innovation and investments in select growth areas and accelerate decision-making processes.

 

    Distinct and Clear Financial Profiles and Compelling Investment Cases. Investment in one or the other company may appeal to investors with different goals, interests and concerns. The Spin-Off will allow investors to make independent investment decisions with respect to Xerox and Conduent and may result in greater alignment between the interests of Conduent’s shareholder base and the characteristics of Conduent’s business, capital structure and financial results.

 

    Performance Incentives. The Spin-Off will enable Conduent to create incentives for its management and employees that are more closely tied to its business performance and shareholder expectations. Conduent’s equity-based compensation arrangements will more closely align the interests of Conduent’s management and employees with the interests of its shareholders and should increase Conduent’s ability to attract and retain personnel.

 

    Capital Structure. The Spin-Off will enable each of Xerox and Conduent to leverage its distinct growth profile and cash flow characteristics to optimize its capital structure and capital allocation strategy.

 

Q: Why is the separation of Conduent structured as a spin-off?

 

A: Xerox believes that a distribution of shares in Conduent that is tax-free to Xerox shareholders for federal income tax purposes is the most efficient way to separate our business from Xerox.

 

Q: What will I receive in the Spin-Off in respect of my Xerox common stock?

 

A: As a holder of Xerox common stock, you will receive a dividend of one share of our common stock for every five shares of Xerox common stock you hold on the Record Date (as defined below). The distribution agent will distribute only whole shares of our common stock in the Spin-Off. See “—How will fractional shares be treated in the Distribution?” for more information on the treatment of the fractional shares you may be entitled to receive in the Distribution. Your proportionate interest in Xerox will not change as a result of the Spin-Off. For a more detailed description, see “The Spin-Off.”

 

Q: What is being distributed in the Spin-Off?

 

A: Xerox will distribute approximately 202,795,510 shares of our common stock in the Spin-Off, based on the approximately 1,013,977,552 shares of Xerox common stock outstanding as of October 31, 2016. The actual number of shares of our common stock that Xerox will distribute will depend on the total number of shares of Xerox common stock outstanding on the Record Date. The shares of our common stock that Xerox distributes will constitute all of the issued and outstanding shares of our common stock immediately prior to the Distribution. For more information on the shares being distributed in the Spin-Off, see “Description of Our Capital Stock—Common Stock.”

 

Q: What is the record date for the Distribution?

 

A: Xerox will determine record ownership as of the close of business on December 15, 2016, which we refer to as the “Record Date.”

 

Q: When will the Distribution occur?

 

A: The Distribution will be effective as of 11:59 p.m., New York City time, on December 31, 2016, which we refer to as the “Distribution Date.” On or shortly after the Distribution Date, the whole shares of our common stock will be credited in book-entry accounts for Xerox shareholders entitled to receive the shares in the Distribution. See “—How will Xerox distribute shares of our common stock?” for more information on how to access your book-entry account or your bank, brokerage or other account holding our common stock you receive in the Distribution on and following the Distribution Date.

 



 

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Q: What do I have to do to participate in the Distribution?

 

A: You are not required to take any action, but we urge you to read this Information Statement carefully. Holders of Xerox common stock on the Record Date will not need to pay any cash or deliver any other consideration, including any shares of Xerox common stock, in order to receive shares of our common stock in the Distribution. In addition, no shareholder approval of the Distribution is required. We are not asking you for a vote and request that you do not send us a proxy card.

 

Q: If I sell my shares of Xerox common stock on or before the Distribution Date, will I still be entitled to receive shares of Conduent common stock in the Distribution?

 

A: If you sell your shares of Xerox common stock before the Record Date, you will not be entitled to receive shares of Conduent common stock in the Distribution. If you hold shares of Xerox common stock on the Record Date and decide to sell them on or before the Distribution Date, you may choose to sell your Xerox common stock with or without your entitlement to our common stock to be distributed in the Spin-Off. You should discuss these options with your bank, broker or other nominee. See “The Spin-Off—Trading Prior to the Distribution Date” for more information.

 

Q: How will Xerox distribute shares of our common stock?

 

A: Registered shareholders: If you are a registered shareholder (meaning you own your shares of Xerox common stock directly through Xerox’s transfer agent, Computershare Trust Company, N.A.), our distribution agent will credit the whole shares of our common stock you receive in the Distribution to a new book-entry account with our transfer agent on or shortly after the Distribution Date. Our distribution agent will mail you a book-entry account statement that reflects the number of whole shares of our common stock you own. You will be able to access information regarding your book-entry account holding the Conduent shares at www.computershare.com/investor or by calling 800-446-2617.

“Street name” or beneficial shareholders: If you own your shares of Xerox common stock beneficially through a bank, broker or other nominee, your bank, broker or other nominee will credit your account with the whole shares of our common stock you receive in the Distribution on or shortly after the Distribution Date. Please contact your bank, broker or other nominee for further information about your account.

We will not issue any physical stock certificates to any shareholders, even if requested. See “The Spin-Off—When and How You Will Receive Conduent Shares” for a more detailed explanation.

 

Q: How will fractional shares be treated in the Distribution?

 

A: The distribution agent will not distribute any fractional shares of our common stock in connection with the Spin-Off. Instead, the distribution agent will aggregate all fractional shares into whole shares and sell the whole shares in the open market at prevailing market prices on behalf of Xerox shareholders entitled to receive a fractional share. The distribution agent will then distribute the aggregate cash proceeds of the sales, net of brokerage fees and other costs, pro rata to these holders (net of any required withholding for taxes applicable to each holder). We anticipate that the distribution agent will make these sales in the “when-issued” market, and “when-issued” trades will generally settle within four trading days following the Distribution Date. See “—How will our common stock trade?” for additional information regarding “when-issued” trading and “The Spin-Off—Treatment of Fractional Shares” for a more detailed explanation of the treatment of fractional shares. The distribution agent will, in its sole discretion, without any influence by Xerox or us, determine when, how, through which broker-dealer and at what price to sell the whole shares of our common stock. The distribution agent is not, and any broker-dealer used by the distribution agent will not be, an affiliate of either Xerox or us.

 



 

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Q: What are the U.S. federal income tax consequences to me of the Distribution?

 

A: For U.S. federal income tax purposes, no gain or loss should be recognized by, or be includible in the income of, a U.S. Holder (as defined in “The Spin-Off—Material U.S. Federal Income Tax Consequences of the Spin-Off”) as a result of the Distribution, except with respect to any cash received by Xerox shareholders in lieu of fractional shares. In addition, the aggregate tax basis of the Xerox common stock and our common stock held by each U.S. Holder immediately after the Distribution will be the same as the aggregate tax basis of the Xerox common stock held by the U.S. Holder immediately before the Distribution, allocated between the Xerox common stock and our common stock in proportion to their relative fair market values on the date of the Distribution (subject to certain adjustments).

See “The Spin-Off—Material U.S. Federal Income Tax Consequences of the Spin-Off” for more information regarding the potential tax consequences to you of the Spin-Off.

 

Q: Does Conduent intend to pay cash dividends?

 

A: We intend to retain future earnings for use in the operation of our business and to fund future growth. We do not anticipate paying any dividends on our common stock for the foreseeable future. See “Dividend Policy” for more information.

 

Q: Will Conduent incur any debt prior to or at the time of the Distribution?

 

A: In connection with the Spin-Off, we expect to incur additional borrowings in order to redistribute debt between us and Xerox, such that we will have a total principal amount of debt of approximately $2,250 million immediately following the separation (consisting of approximately $2,200 million of new borrowings plus approximately $50 million of existing debt). It is currently anticipated that this indebtedness will consist of secured term loans or senior unsecured notes, or a combination of the foregoing. Approximately $1,905 million of the proceeds of the new borrowings will be transferred to Xerox prior to the consummation of the Spin-Off.

 

Q: How will our common stock trade?

 

A: Currently, there is no public market for our common stock. We intend to list our common stock on the New York Stock Exchange under the symbol “CNDT.”

We anticipate that trading in our common stock will begin on a “when-issued” basis as early as two trading days prior to the Record Date for the Distribution and will continue up to and including the Distribution Date. “When-issued” trading in the context of a spin-off refers to a sale or purchase made conditionally on or before the Distribution Date because the securities of the spun-off entity have not yet been distributed. “When-issued” trades generally settle within four trading days after the Distribution Date. On the first trading day following the Distribution Date, any “when-issued” trading of our common stock will end and “regular-way” trading will begin. “Regular-way” trading refers to trading after the security has been distributed and typically involves a trade that settles on the third full trading day following the date of the trade. See “The Spin-Off—Trading Prior to the Distribution Date” for more information. We cannot predict the trading prices for our common stock before, on or after the Distribution Date.

 

Q: Will the Spin-Off affect the trading price of my Xerox common stock?

 

A: We expect the trading price of shares of Xerox common stock immediately following the Distribution to be lower than the trading price immediately prior to the Distribution because the trading price will no longer reflect the value of the BPO Business. There can be no assurance that, following the Distribution, the combined trading prices of the Xerox common stock and our common stock will equal or exceed what the trading price of Xerox common stock would have been in the absence of the Spin-Off.

It is possible that after the Spin-Off, the combined equity value of Xerox and Conduent will be less than Xerox’s equity value before the Spin-Off.

 



 

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Q: Do I have appraisal rights in connection with the Spin-Off?

 

A: No. Holders of Xerox common stock are not entitled to appraisal rights in connection with the Spin-Off.

 

Q: Who is the transfer agent and registrar for our common stock?

 

A: Computershare Trust Company, N.A.

 

Q: Are there risks associated with owning shares of our common stock?

 

A: Yes. Our business faces both general and specific risks and uncertainties. Our business also faces risks relating to the Spin-Off. Following the Spin-Off, we will also face risks associated with being an independent, publicly traded company. Accordingly, you should read carefully the information set forth under “Risk Factors” in this Information Statement.

 

Q: How will Xerox preferred stock be treated in the Spin-Off?

 

A: As of October 31, 2016, there were 300,000 shares of Series A Convertible Perpetual Preferred Stock of Xerox, which we refer to as the “Xerox Series A Preferred Stock,” outstanding, all of which were held by Mr. Darwin Deason. Xerox and Conduent have entered into an agreement with Mr. Deason, which we refer to as the “Exchange Agreement” and which is filed as an exhibit to the Registration Statement on Form 10 of which this Information Statement is a part, to, subject to the completion of the Spin-Off, among other conditions, exchange all of the outstanding shares of Xerox Series A Preferred Stock for newly-issued shares of Series B Convertible Perpetual Preferred Stock of Xerox, which we refer to as the “Xerox Series B Preferred Stock,” and for newly-issued shares of Series A Convertible Perpetual Preferred Stock of Conduent, which we refer to as the “Conduent Series A Preferred Stock.” For more detail, see “The Spin-Off—Treatment of Xerox Preferred Stock in the Spin-Off.”

 

Q: Where can I get more information?

 

A: If you have any questions relating to the mechanics of the Distribution, you should contact the distribution agent at:

Computershare Trust Company, N.A.

250 Royall Street

Canton, MA 02021

Phone: 800-446-2617 or 781-575-2723

Before the Spin-Off, if you have any questions relating to the Spin-Off, you should contact Xerox at:

Investor Relations

Xerox Corporation

45 Glover Avenue

Mail Stop XWHQ 7052

Norwalk, CT 06856

After the Spin-Off, if you have any questions relating to Conduent, you should contact us at:

Investor Relations

Conduent Incorporated

233 Mount Airy Road, Suite 100

Basking Ridge, NJ 07920

 



 

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Summary of the Spin-Off

 

Distributing Company

Xerox Corporation, a New York corporation that holds all of our common stock issued and outstanding prior to the Distribution. After the Distribution, Xerox will not own any shares of our common stock.

 

Distributed Company

Conduent Incorporated, a New York corporation and a wholly owned subsidiary of Xerox. At the time of the Distribution, we will hold, directly or through our subsidiaries, the assets and liabilities of the BPO Business. After the Spin-Off, we will be an independent, publicly traded company.

 

Distributed Securities

All of the shares of our common stock owned by Xerox, which will be 100% of our common stock issued and outstanding immediately prior to the Distribution. Based on the approximately 1,013,977,552 shares of Xerox common stock outstanding on October 31, 2016, and applying the distribution ratio of one share of our common stock for every five shares of Xerox common stock, approximately 202,795,510 shares of our common stock will be distributed.

 

Record Date

The Record Date is the close of business on December 15, 2016.

 

Distribution Date

The Distribution Date is December 31, 2016.

 

Internal Transactions

A portion of the BPO Business is currently held by subsidiaries of Xerox other than Conduent. In connection with the Spin-Off, Xerox will undertake the Internal Transactions so that we hold the entire BPO Business. See “Certain Relationships and Related Party Transactions—Agreements with Xerox—Separation and Distribution Agreement.”

 

Distribution Ratio

Each holder of Xerox common stock will receive one share of our common stock for every five shares of Xerox common stock it holds on the Record Date. The distribution agent will distribute only whole shares of our common stock in the Spin-Off. See “The Spin-Off—Treatment of Fractional Shares” for more detail. Please note that if you sell your shares of Xerox common stock on or before the Distribution Date, the buyer of those shares may in some circumstances be entitled to receive the shares of our common stock to be distributed in respect of the Xerox shares that you sold. See “The Spin-Off—Trading Prior to the Distribution Date” for more detail.

 

The Distribution

   

On the Distribution Date, Xerox will release the shares of our common stock to the distribution agent to distribute to Xerox shareholders. Xerox will distribute our shares in book-entry form and thus we will not issue any physical stock certificates. We expect that it will take the distribution agent up to two weeks to electronically issue shares of our common stock to you or your bank or brokerage firm on your behalf by way of direct registration in book-entry form.

 



 

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  You will not be required to make any payment, surrender or exchange your shares of Xerox common stock or take any other action to receive your shares of our common stock.

 

Fractional Shares

The distribution agent will not distribute any fractional shares of our common stock to Xerox shareholders. Instead, the distribution agent will first aggregate fractional shares into whole shares, then sell the whole shares in the open market at prevailing market prices on behalf of Xerox shareholders entitled to receive a fractional share, and finally distribute the aggregate cash proceeds of the sales, net of brokerage fees and other costs, pro rata to these holders (net of any required withholding for taxes applicable to each holder). If you receive cash in lieu of fractional shares, you will not be entitled to any interest on the payments. The cash you receive in lieu of fractional shares generally will, for U.S. federal income tax purposes, be taxable as described under “The Spin-Off—Material U.S. Federal Income Tax Consequences of the Spin-Off.”

 

Conditions to the Spin-Off

Completion of the Spin-Off is subject to the satisfaction, or the Xerox Board’s waiver, of the following conditions:

 

    the Xerox Board shall have authorized and approved the Internal Transactions and Distribution and not withdrawn such authorization and approval, and shall have declared the dividend of our common stock to Xerox shareholders;

 

    the ancillary agreements contemplated by the Separation and Distribution Agreement shall have been executed by each party to those agreements;

 

    our common stock shall have been accepted for listing on the New York Stock Exchange or another national securities exchange approved by Xerox, subject to official notice of issuance;

 

    the Securities and Exchange Commission (the “SEC”) shall have declared effective our Registration Statement on Form 10, of which this Information Statement is a part, under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and no stop order suspending the effectiveness of the Registration Statement shall be in effect and no proceedings for that purpose shall be pending before or threatened by the SEC;

 

    Xerox shall have received the written opinion of Cravath, Swaine & Moore LLP, which shall remain in full force and effect, that, subject to the accuracy of and compliance with certain representations, warranties and covenants, the Distribution should qualify for non-recognition of gain and loss under Section 355 of the Internal Revenue Code of 1986, as amended (the “Code”);

 

    Xerox shall have received a private letter ruling from the U.S. Internal Revenue Service (the “IRS”) regarding certain U.S. federal income tax consequences of the Spin-Off (the “IRS Ruling”), and the IRS Ruling shall continue to be effective and valid;

 



 

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    the Internal Transactions (as described in “Certain Relationships and Related Party Transactions—Agreements with Xerox—Separation and Distribution Agreement”) shall have been completed;

 

    no order, injunction or decree issued by any governmental authority of competent jurisdiction or other legal restraint or prohibition preventing consummation of the Distribution shall be in effect, and no other event outside the control of Xerox shall have occurred or failed to occur that prevents the consummation of the Distribution;

 

    no other events or developments shall have occurred prior to the Distribution Date that, in the judgment of the Xerox Board, would result in the Distribution having a material adverse effect on Xerox or its shareholders;

 

    prior to the Distribution Date, notice of Internet availability of this Information Statement or this Information Statement shall have been mailed to the holders of Xerox common stock as of the Record Date;

 

    Xerox shall have duly elected the individuals to be listed as members of our post-Distribution board of directors, or our “Board,” in this Information Statement, and such individuals shall be the members of our Board immediately after the Distribution; provided that our current directors shall appoint one independent director prior to the date on which “when-issued” trading of our common stock commences on the New York Stock Exchange and such director shall serve on our Audit Committee, Compensation Committee and Corporate Governance Committee; and

 

    immediately prior to the Distribution Date, our Restated Certificate of Incorporation and Amended and Restated By-Laws, each in substantially the form filed as an exhibit to the Registration Statement on Form 10 of which this Information Statement is a part, shall be in effect.

 

  The fulfillment of the foregoing conditions will not create any obligation on the part of Xerox to complete the Spin-Off. We are not aware of any material federal, foreign or state regulatory requirements with which we must comply, other than SEC rules and regulations, or any material approvals that we must obtain, other than the approval for listing of our common stock and the SEC’s declaration of the effectiveness of the Registration Statement, in connection with the Distribution. Xerox has the right not to complete the Spin-Off if, at any time, the Xerox Board determines, in its sole and absolute discretion, that the Spin-Off is not in the best interests of Xerox or its shareholders or is otherwise not advisable.

 

 

Xerox has entered into a letter agreement with the Icahn Group (as defined in such agreement) and filed as Exhibit 10(s) to Xerox’s Current Report on Form 8-K dated January 29, 2016 (the “Icahn Agreement”). Under the Icahn Agreement, if the Spin-Off has not

 



 

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occurred by December 31, 2016, Xerox must call its 2017 annual shareholders meeting to be held no later than March 31, 2017, at which meeting any shareholder of Xerox that has delivered written notice, which includes the information required by Xerox’s by-laws, to Xerox on or prior to January 31, 2017 shall be permitted to nominate directors of Xerox and/or propose other business. However, if the Spin-Off occurs on or before March 30, 2017 (even if it did not occur by December 31, 2016), then Xerox will not be required to hold its 2017 annual shareholders meeting by March 31, 2017.

 

Preferred Stock

On October 27, 2016, Xerox and Conduent entered into the Exchange Agreement with Mr. Deason. Pursuant to the terms of the Exchange Agreement, subject to the completion of the Spin-Off, among other conditions, Xerox will transfer 180,000 shares of Xerox Series B Preferred Stock and 120,000 shares of Conduent Series A Preferred Stock to Mr. Deason in exchange for all of Mr. Deason’s shares of Xerox Series A Preferred Stock. For more detail, see “The Spin-Off—Treatment of Xerox Preferred Stock in the Spin-Off.”

 

Trading Market and Symbol

    We have applied to list our common stock on the New York Stock Exchange under the symbol “CNDT.” We anticipate that, as early as two trading days prior to the Record Date, trading of shares of our common stock will begin on a “when-issued” basis and will continue up to and including the Distribution Date, and we expect that “regular-way” trading of our common stock will begin the first trading day after the Distribution Date.

 

  We also anticipate that, as early as two trading days prior to the Record Date, there will be two markets in Xerox common stock: (i) a “regular-way” market on which shares of Xerox common stock will trade with an entitlement for the purchaser of Xerox common stock to receive shares of our common stock to be distributed in the Distribution, and (ii) an “ex-distribution” market on which shares of Xerox common stock will trade without an entitlement for the purchaser of Xerox common stock to receive shares of our common stock. See “The Spin-Off—Trading Prior to the Distribution Date.”

 

Tax Consequences to Xerox Shareholders

For U.S. federal income tax purposes, no gain or loss should be recognized by, or be includible in the income of, a U.S. Holder (as defined in “The Spin-Off—Material U.S. Federal Income Tax Consequences of the Spin-Off”) as a result of the Distribution, except with respect to any cash received in lieu of a fractional share. In addition, the aggregate tax basis of the Xerox common stock and our common stock held by each U.S. Holder immediately after the Distribution will be the same as the aggregate tax basis of the Xerox common stock held by the U.S. Holder immediately before the Distribution, allocated between the Xerox common stock and our common stock in proportion to their relative fair market values on the date of the Distribution (subject to certain adjustments). See “The Spin-Off—Material U.S. Federal Income Tax Consequences of the Spin-Off.”

 



 

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  We urge you to consult your tax advisor as to the specific tax consequences of the Distribution to you, including the effect of any U.S. federal, state, local or foreign tax laws and of changes in applicable tax laws.

 

Relationship with Xerox after the Spin-Off

We intend to enter into several agreements with Xerox related to the Spin-Off, which will govern the relationship between Xerox and us up to and after completion of the Spin-Off and allocate between Xerox and us various assets, liabilities, rights and obligations. These agreements include:

 

    a Separation and Distribution Agreement that will set forth Xerox’s and our agreements regarding the principal actions that both parties will take in connection with the Spin-Off and aspects of our relationship following the Spin-Off;

 

    a Transition Services Agreement pursuant to which Xerox and we will provide each other specified services on a transitional basis to help ensure an orderly transition following the Spin-Off;

 

    a Tax Matters Agreement that will govern the respective rights, responsibilities and obligations of Xerox and us after the Spin-Off with respect to all tax matters and will include restrictions to preserve the tax-free status of the Distribution; and

 

    an Employee Matters Agreement that will address employment, compensation and benefits matters, including the allocation and treatment of assets and liabilities relating to employees and compensation and benefits plans and programs in which our employees participated.

 

  We describe these arrangements in greater detail under “Certain Relationships and Related Party Transactions,” and describe some of the risks of these arrangements under “Risk Factors—Risks Relating to the Spin-Off.”

 

Dividend Policy

We intend to retain future earnings for use in the operation of our business and to fund future growth. We do not anticipate paying any dividends on our common stock for the foreseeable future. See “Dividend Policy.”

 

Transfer Agent

Computershare Trust Company, N.A.

 

Risk Factors

Our business faces both general and specific risks and uncertainties. Our business also faces risks relating to the Spin-Off. Following the Spin-Off, we will also face risks associated with being an independent, publicly traded company. Accordingly, you should read carefully the information set forth under “Risk Factors.”

 



 

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RISK FACTORS

You should carefully consider all of the information in this Information Statement and each of the risks described below, which we believe are the principal risks that we face. Some of the risks relate to our business, others to the Spin-Off. Some risks relate principally to the securities markets and ownership of our common stock.

Any of the following risks could materially adversely affect our results of operations and financial condition and the actual outcome of matters as to which forward-looking statements are made in this Information Statement.

Risks Relating to Our Business

Our government contracts are subject to termination rights, audits and investigations, which, if exercised, could negatively impact our reputation and reduce our ability to compete for new contracts.

A significant portion of our revenues is derived from contracts with U.S. federal, state and local governments and their agencies, and some of our revenues are derived from contracts with foreign governments and their agencies. Government entities typically finance projects through appropriated funds. While these projects are often planned and executed as multi-year projects, government entities usually reserve the right to change the scope of or terminate these projects for lack of approved funding and/or at their convenience. Changes in government or political developments, including budget deficits, shortfalls or uncertainties, government spending reductions (e.g., Congressional sequestration of funds under the Budget Control Act of 2011) or other debt or funding constraints, such as those recently experienced in the United States and Europe, could result in lower governmental sales and in our projects being reduced in price or scope or terminated altogether, which also could limit our recovery of incurred costs, reimbursable expenses and profits on work completed prior to the termination. Additionally, if the government discovers improper or illegal activities or contractual non-compliance (including improper billing), we may be subject to various civil and criminal penalties and administrative sanctions, which may include termination of contracts, forfeiture of profits, suspension of payments, fines and suspensions or debarment from doing business with the government. Any resulting penalties or sanctions could materially adversely affect our results of operations and financial condition. Moreover, government contracts are generally subject to audits and investigations by government agencies. If the government finds that we inappropriately charged any costs to a contract, the costs are not reimbursable or, if already reimbursed, the cost must be refunded to the government. Further, the negative publicity that could arise from any such penalties, sanctions or findings in such audits or investigations could have an adverse effect on our reputation in the industry and reduce our ability to compete for new contracts and could materially adversely affect our results of operations and financial condition.

We derive significant revenue and profit from commercial and government contracts awarded through competitive bidding processes, including renewals, which can impose substantial costs on us, and we will not achieve revenue and profit objectives if we fail to accurately and effectively bid on such projects.

Many of these contracts are extremely complex and require the investment of significant resources in order to prepare accurate bids and proposals. Competitive bidding imposes substantial costs and presents a number of risks, including: (i) the substantial cost and managerial time and effort that we spend to prepare bids and proposals for contracts that may or may not be awarded to us; (ii) the need to estimate accurately the resources and costs that will be required to implement and service any contracts we are awarded, sometimes in advance of the final determination of their full scope and design; (iii) the expense and delay that may arise if our competitors protest or challenge awards made to us pursuant to competitive bidding and the risk that such protests or challenges could result in the requirement to resubmit bids and in the termination, reduction or modification of the awarded contracts; and (iv) the opportunity cost of not bidding on and winning other contracts we might otherwise pursue. If our competitors protest or challenge an award made to us on a government contract, the costs to defend such an award may be significant and could involve subsequent litigation that could take years to resolve.

 

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We rely to a significant extent on third-party providers, such as subcontractors, a relatively small number of primary software vendors, utility providers and network providers; if they cannot deliver or perform as expected or if our relationships with them are terminated or otherwise change, our results of operations and financial condition could be materially adversely affected.

Our ability to service our customers and clients and deliver and implement solutions depends to a large extent on third-party providers such as subcontractors, a relatively small number of primary software vendors, software application developers, utility providers and network providers meeting their obligations to us and our expectations in a timely, quality manner. Our results of operations and financial condition could be materially adversely affected and we might incur significant additional liabilities if any of our third-party providers do not meet these obligations or our or our clients’ expectations or if they terminate or refuse to renew their relationships with us or were to offer their products to us with less advantageous prices and other terms than we previously had.

Failure to deliver on our contractual obligations properly and on time could materially adversely affect our results of operations and financial condition.

Our business model depends in large part on our ability to retain existing and attract new work from our base of existing clients, as well as on relationships we develop with our clients so that we can understand our clients’ needs and deliver solutions and services that are tailored to meet those needs. In order for our business to grow, we must successfully manage the provision of services under our contracts. If a client is not satisfied with the quality of work performed by us or a subcontractor, or with the type of services or solutions delivered, then we could incur additional costs to address the situation, the profitability of that work might be impaired and the client’s dissatisfaction with our services could damage our ability to obtain additional work from that client or obtain new work from other potential clients. In particular, many of our contracts with non-government clients may be terminated by the client, without cause, upon specified advance notice, so clients who are not satisfied might seek to terminate existing contracts prior to their scheduled expiration date, which may result in our inability to fully recover our up-front investments. In addition, clients could direct future business to our competitors. We could also trigger contractual credits to clients or a contractual default. Failure to properly transition new clients to our systems, properly budget transition costs or accurately estimate contract operational costs could result in delays in our contract performance, trigger service level penalties, impair fixed or intangible assets or result in contract profit margins that do not meet our expectations or our historical profit margins.

In addition, we incur significant expenditures for the development and construction of system software platforms needed to support our clients’ needs. Our failure to fully understand client requirements or implement the appropriate operating systems or databases or solutions which enable the use of other supporting software may delay the project and result in cost overruns or potential impairment of the related software platforms, which could materially adversely affect our results of operations and financial condition.

In May 2015, we entered into a contract with New York for the implementation of a Medicaid Management Information System. Due to a number of factors, development work for our implementation in New York has been elongated beyond the current contractual schedule resulting in, among other things, increased delivery costs, which we have considered in our estimates of revenues and costs under the percentage-of-completion accounting methodology.

We continue to work with New York to address new regulatory requirements, policy changes and enhanced security protocols, which are expected to further lengthen the schedule and may result in material increases in future costs to complete. We are seeking to mitigate these impacts through a combination of operational actions as well as by working with New York to pursue an amendment to the contract that will revise the project schedule and increase the reimbursement we receive from New York. Although we have been in discussions with New York to amend the contract, in the event we are unable to satisfactorily agree to an amendment, this could materially adversely affect our results of operations and financial condition.

 

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We face significant competition and our failure to compete successfully could materially adversely affect our results of operations and financial condition.

We operate in an environment of significant competition, driven by rapid technological developments, changes in industry standards and demands of customers to become more efficient. Our competitors range from large international companies to relatively small firms. Some of the large international companies have significant financial resources and compete with us globally to provide business process services in each of the markets we serve. In addition, we must frequently compete with a client’s own internal business process and information technology capabilities, which may constitute a fixed cost for the client. We compete primarily on the basis of technology, performance, price, quality, reliability, brand, distribution and customer service and support. Our success in future performance is largely dependent upon our ability to compete successfully in the markets we currently serve, to promptly and effectively react to changing technologies and customer expectations and to expand into additional market segments. To remain competitive, we must develop services and applications; periodically enhance our existing offerings; remain cost efficient; and attract and retain key personnel and management. If we are unable to compete successfully, we could lose market share and important customers to our competitors and that could materially adversely affect our results of operations and financial condition.

Our business is dependent on continued interest in outsourcing.

Our business and growth depend in large part on continued interest in outsourced business process services. Outsourcing means that an entity contracts with a third party, such as us, to provide business process services rather than perform such services in-house. There can be no assurance that this interest will continue, as organizations may elect to perform such services themselves and/or the business process outsourcing industry could move to an as-a-Service model, thereby eliminating traditional business process outsourcing tasks. A significant change in this interest in outsourcing could materially adversely affect our results of operations and financial condition. Additionally, there can be no assurance that our cross-selling efforts will cause clients to purchase additional services from us or adopt a single-source outsourcing approach.

Our profitability is dependent upon our ability to obtain adequate pricing for our services and to improve our cost structure.

Our success depends on our ability to obtain adequate pricing for our services that will provide a reasonable return to our shareholders. Depending on competitive market factors, future prices we obtain for our services may decline from previous levels. If we are unable to obtain adequate pricing for our services, it could materially adversely affect our results of operations and financial condition. In addition, our contracts are increasingly requiring tighter timelines for implementation as well as more stringent service level metrics. This makes the bidding process for new contracts much more difficult and requires us to adequately consider these requirements in the pricing of our services.

We regularly review our operations with a view towards reducing our cost structure, including, without limitation, reducing our employee base, exiting certain businesses, improving process and system efficiencies and outsourcing some internal functions. We from time to time engage in restructuring actions to reduce our cost structure. On January 29, 2016, Xerox announced a three-year strategic transformation program targeting cost savings across all segments, including the BPO Business. If we are unable to continue to maintain our cost base at or below the current level and maintain process and systems changes resulting from prior restructuring actions or to realize the expected cost reductions in the ongoing strategic transformation program, it could materially adversely affect our results of operations and financial condition.

In addition, in order to meet the service requirements of our customers, which often includes 24/7 service, and to optimize our employee cost base, including our back-office support, we often locate our delivery service and back-office support centers in lower-cost locations, including several developing countries. Concentrating our centers in these locations presents a number of operational risks, many of which are beyond our control, including the risks of political instability, natural disasters, safety and security risks, labor disruptions, excessive employee turnover and rising labor rates. Additionally, a change in the political environment in the United States

 

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or the adoption and enforcement of legislation and regulations curbing the use of such centers outside of the United States could materially adversely affect our results of operations and financial condition. These risks could impair our ability to effectively provide services to our customers and keep our costs aligned to our associated revenues and market requirements.

Our ability to sustain and improve profit margins is dependent on a number of factors, including our ability to continue to improve the cost efficiency of our operations through such programs as robotic process automation, to absorb the level of pricing pressures on our services through cost improvements and to successfully complete information technology initiatives. If any of these factors adversely materialize or if we are unable to achieve and maintain productivity improvements through restructuring actions or information technology initiatives, our ability to offset labor cost inflation and competitive price pressures would be impaired, each of which could materially adversely affect our results of operations and financial condition.

We may be subject to claims of infringement of third-party intellectual property rights which could adversely affect our results of operation and financial condition.

We rely heavily on the use of intellectual property. We do not own a significant portion of the software that we use to run our business; instead we license this software from a small number of primary vendors. If these vendors assert claims that we or our clients are infringing on their software or related intellectual property, we could incur substantial costs to defend these claims, which could materially adversely affect our results of operations and financial condition. In addition, if any of our vendors’ infringement claims are ultimately successful, our vendors could require us to (i) cease selling or using products or services that incorporate the challenged software or technology, (ii) obtain a license or additional licenses from our vendors or (iii) redesign our services which rely on the challenged software or technology. In addition, we may be exposed to claims for monetary damages. If we are unsuccessful in defending an infringement claim and our vendors require us to initiate any of the above actions, or we are required to pay monetary damages, then such actions could materially adversely affect our results of operations and financial condition.

We are subject to laws of the United States and foreign jurisdictions relating to individually identifiable information and personal health information, and failure to comply with those laws, whether or not inadvertent, could subject us to legal actions and negatively impact our operations.

We receive, process, transmit and store information relating to identifiable individuals, both in our role as a service provider and as an employer. As a result, we are subject to numerous United States (both federal and state) and foreign jurisdiction laws and regulations designed to protect both individually identifiable information as well as personal health information, including the Health Insurance Portability and Accountability Act of 1996, as amended (“HIPAA”) and the HIPAA regulations governing, among other things, the privacy, security and electronic transmission of individually identifiable health information, and the European Union Directive on Data Protection (Directive 95/46/EC). Other United States (both federal and state) and foreign jurisdiction laws apply to our processing of individually identifiable information and these laws have been subject to frequent changes, and new legislation in this area may be enacted at any time. For example, the recent invalidation of the U.S.-EU Safe Harbor regime will require us to implement alternative mechanisms in order for some of our data flows from Europe to the United States to comply with applicable law. Changes to existing laws, introduction of new laws in this area or failure to comply with existing laws that are applicable to us may subject us to, among other things, additional costs or changes to our business practices, liability for monetary damages, fines and/or criminal prosecution, unfavorable publicity, restrictions on our ability to obtain and process information and allegations by our customers and clients that we have not performed our contractual obligations, any of which could materially adversely affect our results of operations and financial condition.

 

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We are subject to laws of the United States and foreign jurisdictions relating to processing certain financial transactions, including payment card transactions and debit or credit card transactions, and failure to comply with those laws, whether or not inadvertent, could subject us to legal actions and materially adversely affect our results of operations and financial condition.

We receive, process and implement financial transactions, and disburse funds, on behalf of both government and commercial customers. This activity includes receiving debit and credit card information to process payments due to our customers as well as disbursing funds on payment or debit cards to payees of our customers. As a result, we are subject to numerous United States (both federal and state) and foreign jurisdiction laws and regulations, including the Electronic Fund Transfer Act, as amended, the Currency and Foreign Transactions Reporting Act of 1970 (commonly known as the Bank Secrecy Act), as amended, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (including the so-called Durbin Amendment), as amended, the Gramm-Leach-Bliley Act (also known as the Financial Modernization Act of 1999), as amended, and the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT ACT) Act of 2001, as amended. Other United States (both federal and state) and foreign jurisdiction laws apply to our processing of certain financial transactions and these laws have been subject to frequent changes, and new legislation in this area may be enacted at any time. Changes to existing laws, introduction of new laws in this area or failure to comply with existing laws that are applicable to us may subject us to, among other things, additional costs or changes to our business practices, liability for monetary damages, fines and/or criminal prosecution, unfavorable publicity, restrictions on our ability to process financial transactions and allegations by our customers and clients that we have not performed our contractual obligations, any of which could materially adversely affect our results of operations and financial condition.

We are subject to breaches of our security systems and service interruptions which could expose us to liability, impair our reputation or temporarily render us unable to fulfill our service obligations under our contracts.

We have implemented security systems, both directly and with third-party subcontractors and service providers, with the intent of maintaining both the physical security of our facilities and the data security of our customers’, clients’ and suppliers’ confidential information and information related to identifiable individuals (including payment card and debit and credit card information and health information) against unauthorized access through our information systems or by other electronic transmission or through the misdirection, theft or loss of physical media. These include, for example, the appropriate encryption of information. Despite such efforts, we are subject to breach of security systems which may result in unauthorized access to our facilities and/or the information we are trying to protect. Because the techniques used to obtain unauthorized access are constantly changing and becoming increasingly more sophisticated and often are not recognized until launched against a target, we or our third-party service providers may be unable to anticipate these techniques or implement sufficient preventative measures. Additionally, with advances in computer capabilities and data protection requirements to address ongoing threats, we may be required to expend significant capital and other resources to protect against potential security breaches or to alleviate problems caused by security breaches. Moreover, employee error or malfeasance, faulty password management or other irregularities may result in a defeat of our or our third-party service providers’ security measures and breach our or our third-party service providers’ information systems (whether digital or otherwise).

If unauthorized parties gain physical access to one of our or one of our third-party service providers’ facilities or electronic access to our or one of our third-party service providers’ information systems or such information is misdirected, lost or stolen during transmission or transport, any theft or misuse of such information could result in, among other things, unfavorable publicity, governmental inquiry and oversight, difficulty in marketing our services, allegations by our customers and clients that we have not performed our contractual obligations, litigation by affected parties and possible financial obligations for damages related to the theft or misuse of such information, any of which could materially adversely affect our results of operations and financial condition. Moreover, a security breach could require us to devote significant management resources to address the problems created by the security breach and to expend significant additional resources to upgrade further the security measures that we employ to guard such important personal information against cyber attacks

 

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and other attempts to access such information and could result in a disruption of our operations. We also maintain various systems and data centers for our customers. Often these systems and data centers must be maintained worldwide and on a 24/7 basis. Although we endeavor to ensure that there is adequate backup and maintenance of these systems and centers, we could experience service interruptions that could result in curtailed operations and loss of customers, which could reduce our revenues and profits in addition to impairing our reputation. If our information systems and our back-up systems are damaged, breached or cease to function properly, we may have to make a significant investment to repair or replace them, and we may suffer interruptions in our operations in the interim, each of which could materially adversely affect our results of operations and financial condition.

Our ability to recover capital and other investments in connection with our contracts is subject to risk.

In order to attract and retain large outsourcing contracts, we sometimes make significant capital and other investments to enable us to perform our services under those contracts, such as purchases of information technology equipment, facility costs, labor resources and costs incurred to develop and implement software. The net book value of certain assets recorded, including a portion of our intangible assets, could be impaired, and our results of operations and financial condition could be materially adversely affected in the event of the early termination of all or a part of such a contract or a reduction in volumes and services thereunder for reasons such as a customer’s or client’s merger or acquisition, divestiture of assets or businesses, business failure or deterioration or a customer’s or client’s exercise of contract termination rights.

If we underestimate the scope of work or the costs of performance in our contracts, or we misperform our contracts, our results of operations and financial condition could be materially adversely affected.

In order to stay competitive in our industry, we must also keep pace with changing technologies and customer preferences. Many of our contracts require us to design, develop and implement new technological and operating systems for our customers. Many of these systems involve detailed and complex computer source code which must be created and integrated into a working system that meets contract specifications. The accounting for these contracts requires judgment relative to assessing risks, estimating contract revenues and costs and making assumptions for schedule and technical issues. To varying degrees, each contract type involves some risk that we could underestimate the costs and resources necessary to fulfill the contract. In each case, our failure to accurately estimate costs or the resources and technology needed to perform our contracts or to effectively manage and control our costs during the performance of our work could result, and in some instances has resulted, in reduced profits or in losses. In addition, in many of our contracts, we have complicated performance obligations, including, without limitation, designing and building new integrated computer systems or doing actuarial work for pension, medical and other plans with beneficiaries that can rely on future projection of obligations to determine appropriate levels of funding. These contracts carry potential financial penalties or could result in financial damages or exposures if we fail to properly perform those obligations and could result in our results of operations and financial condition being materially adversely affected.

If we are unable to collect our receivables for unbilled services, our results of operations and financial condition could be materially adversely affected.

The profitability of certain of our large contracts depends on our ability to successfully obtain payment from our clients of the amounts they owe us for work performed. Actual losses on client balances could differ from current estimates and, as a result, may require adjustment of our receivables for unbilled services. Our receivables include long-term contracts and over the course of a long-term contract, our customers’ financial condition may change such that their ability to pay their obligations, and our ability to collect our fees for services rendered, is adversely affected. Additionally, we may perform work for the federal, state and local governments, with respect to which we must file requests for equitable adjustment or claims with the proper agency to seek recovery in whole or in part, for out-of-scope work directed or caused by the government customer in support of its project, and the amounts of such recoveries may not meet our expectations or cover our costs. Macroeconomic conditions could result in financial difficulties, including, without limitation, limited

 

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access to the credit markets, insolvency or bankruptcy, for our clients and, as a result, could cause clients to delay payments to us, request modifications to their payment arrangements that could increase our receivables balance or default on their payment obligations to us. Timely collection of client balances also depends on our ability to complete our contractual commitments (for example, achieve specified milestones in percentage-of-completion contracts) and bill and collect our contracted revenues. If we are unable to meet our contractual requirements, we might experience delays in collection of and/or be unable to collect our client balances, and if this occurs, our results of operations and cash flows could be adversely affected. In addition, if we experience an increase in the time to bill and collect for our services, our results of operations and financial condition could be materially adversely affected.

A decline in revenues from or a loss or failure of significant clients could materially adversely affect our results of operations and financial condition.

Our results of operations and financial condition could be materially adversely affected by the loss or failure of significant clients. Some of our clients are in business sectors which have experienced significant financial difficulties or consolidation, and/or the reduction of volumes or their inability to make payments to us, as a result of, among other things, their merger or acquisition, divestiture of assets or businesses, contract expiration, non-renewal or early termination (including termination for convenience) or business or financial failure or deterioration. Economic and political conditions could affect our clients’ businesses and the markets they serve. A prolonged economic downturn or a negative or uncertain political climate could, or could continue to, adversely affect our clients’ financial conditions and the level of business activity of our clients and the industries we serve, which may reduce our clients’ demand for our services or depress pricing of those services and could materially adversely affect our results of operations and financial condition. In addition, we incur certain fixed costs related to providing our services to our clients. Therefore, the loss or failure of any one of our significant clients could leave us with a significantly higher level of fixed costs than is necessary for some period of time to serve our remaining clients, thereby materially adversely affecting our results of operations and financial condition.

We have non-recurring revenue, which subjects us to a risk that our revenues and cash flows from operations may fluctuate from period to period.

Revenue generated from our non-recurring services may fluctuate due to factors both within and outside of our control. Our mix of non-recurring and recurring revenues is impacted by acquisitions as well as growth in our non-recurring lines of business. There is less predictability and certainty in the timing and amount of revenues generated by our non-recurring services and, accordingly, our results of operations and financial condition could be materially adversely affected by the timing and amount of revenues generated from our non-recurring services.

The failure to obtain or maintain a satisfactory credit rating could adversely affect our liquidity, capital position, borrowing costs, access to capital markets and ability to post surety or performance bonds to support clients’ contracts.

Our credit risk is expected to be evaluated by the major independent rating agencies. Once a credit rating is obtained, which we expect to be below investment grade, any future downgrades to such rating could negatively impact our ability to renew contracts with our existing clients, limit our ability to compete for new clients, result in increased premiums for surety or performance bonds to support our clients’ contracts and/or result in a requirement that we provide collateral to secure our surety or performance bonds. Further, certain of our commercial outsourcing contracts provide that, in the event our credit ratings are downgraded to specified levels, the client may elect to terminate its contract with us and either pay a reduced termination fee or, in some limited instances, no termination fee. Such a credit rating downgrade could adversely affect these client relationships. Moreover, once a credit rating is obtained, there may be reductions thereof if we incur additional indebtedness. There can be no assurance that we will be able to maintain our credit ratings once established, and any additional

 

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actual or anticipated downgrades of our credit ratings, including any announcement that our ratings are under review for a downgrade, may have a negative impact on our liquidity, capital position and access to capital markets.

A failure to attract and retain key employees and members of our management team could materially adversely affect our results of operations and financial condition.

Our success depends on the skills, experience and performance of key employees and members of our management team. The competitive environment for employee and management talent in the business processing outsourcing industry could impact our ability to attract and retain key employees and management. Identifying, developing internally or hiring externally, training and retaining key employees and management is critical to our future. Our failure to successfully hire key employees and management or the loss of the services of key employees or members of management could materially adversely affect our results of operations and financial condition.

A failure to attract and retain necessary technical personnel and qualified subcontractors could materially adversely affect our results of operations and financial condition.

Because we operate in intensely competitive markets, our success depends to a significant extent upon our ability to attract, retain and motivate highly skilled and qualified technical personnel and to subcontract with qualified, competent subcontractors. If we fail to attract, train and retain sufficient numbers of qualified engineers, technical staff and sales and marketing representatives or are unable to contract with qualified, competent subcontractors, our results of operations and financial condition could be materially adversely affected. Experienced and capable personnel in the services industry remain in high demand, and there is continual competition for their talents. Additionally, we may be required to increase our hiring in geographic areas outside of the United States, which could subject us to increased geopolitical and exchange rate risk. The loss of any key technical employee or the loss of a key subcontractor relationship could materially adversely affect our results of operations and financial condition.

Increases in the cost of telephone and data services or significant interruptions in such services could materially adversely affect our results of operations and financial condition.

Our business is significantly dependent on telephone and data service provided by various local and long distance telephone and data service providers around the world. Accordingly, any disruption of these services could materially adversely affect our results of operations and financial condition. We have taken steps to mitigate our exposure to service disruptions by investing in redundant circuits, although there is no assurance that the redundant circuits would not also suffer disruption. Any inability to obtain telephone or data services at favorable rates could materially adversely affect our results of operations and financial condition. Where possible, we have entered into long-term contracts with various providers to mitigate short-term rate increases and fluctuations. There is no obligation, however, for the vendors to renew their contracts with us, or to offer the same or lower rates in the future, and such contracts are subject to termination or modification for various reasons outside of our control. A significant increase in the cost of telephone or data services that is not recoverable through an increase in the price of our services could materially adversely affect our results of operations and financial condition. In addition, a number of our facilities are located in jurisdictions outside of the United States where the provision of utility services, including electricity and water, may not be consistently reliable, and while there are backup systems in many of our operating facilities, an extended outage of utility or network services could materially adversely affect our results of operations and financial condition.

We may make acquisitions of businesses, engage in joint ventures or divest our non-core businesses. These strategic decisions, if taken, involve potential risks.

We regularly evaluate opportunities to improve our services through acquisitions of new businesses, investments in joint ventures with other businesses and divestitures of our non-core businesses. In pursuing

 

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acquisitions and joint ventures we may be unable to identify businesses or counterparties that complement our strategies, and even if we identify a business or a counterparty that complements our strategies, we may be unable to acquire such business or transact with such counterparty at a reasonable cost or upon acceptable terms and conditions. The full amount of anticipated benefits of any acquisition, joint venture or divestiture may not be realized on the expected timing or at all. Moreover, any acquisitions we undertake expose us to the risks that come with the incurrence of additional indebtedness and/or could result in dilutive effects on the issuance of additional equity securities. In addition, the actual integration of an acquired business may divert attention of management from operating the existing business and could result in additional and unforeseen expenses. We may fail to sustain the acquired businesses’ quality of services that we have historically provided and key employees of the acquired business may leave after the acquisition.

Divestitures of our non-core businesses could have similar effects, including the loss of earnings of the divested business or operation. Failure to execute acquisitions, investments and divestitures in a satisfactory manner could materially adversely affect our results of operations and financial condition.

We will be a holding company and, therefore, may not be able to receive dividends or other payments in needed amounts from our subsidiaries.

Our principal assets are the shares of capital stock and indebtedness of our subsidiaries. We rely on dividends, interest and other payments from these subsidiaries to meet our obligations for paying principal and interest on outstanding debt obligations, paying corporate expenses and, if determined by our Board, paying dividends to shareholders and repurchasing common shares. Certain of our subsidiaries are subject to regulatory requirements of the jurisdictions in which they operate or other restrictions that may limit the amounts that these subsidiaries can pay in dividends or other payments to us. No assurance can be given that there will not be further changes in law, regulatory actions or other circumstances that could restrict the ability of our subsidiaries to pay dividends to us. In addition, due to differences in tax rates, repatriation of funds from certain countries into the United States could have unfavorable tax ramifications for us. Furthermore, no assurance can be given that our subsidiaries may be able to make timely payments to us in order for us to meet our obligations.

Our ability to obtain future contracts, or perform services under existing contracts, for certain government clients is dependent on our ability to maintain necessary security clearances.

Select U.S. and non-U.S. government clients require us to maintain security clearances for certain of our facilities used in the performance of classified contracts. Employees who perform under certain government contracts are required to possess appropriate personnel security clearances for access to classified information granted by the respective government. The competition for qualified personnel who possess security clearance is very strong in certain public sector markets. In the event that a government customer were to revoke the facility and/or personnel clearances of all or substantially all of the employees performing work under a classified contract, such revocation could be grounds for termination of the contract by the government customer and impede the ability to obtain future contracts. Similarly, if we are unable to hire sufficient qualified and cleared personnel to meet contractual commitments, a contract could be terminated for non-performance. Under either circumstance, such termination, depending on the contract value, could materially adversely affect our results of operations and financial condition.

Our results of operations and financial condition could be materially adversely affected by legal and regulatory matters.

We are potentially subject to various contingent liabilities that are not reflected on our balance sheet, including those arising as a result of being involved in a variety of claims, lawsuits, investigations and proceedings concerning: securities law; governmental entity contracting, servicing and procurement law; intellectual property law; environmental law; employment law; the Employee Retirement Income Security Act of 1974 (ERISA); and other laws and regulations, as discussed under Note 15—Contingencies and Litigation in our Combined Financial Statements included elsewhere in this Information Statement. Should developments in any

 

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of these matters cause a change in our determination as to an unfavorable outcome and result in the need to recognize a material accrual or materially increase an existing accrual, or should any of these matters result in a final adverse judgment or be settled for significant amounts above any existing accruals, it could materially adversely affect our results of operations and financial condition in the period or periods in which such change in determination, judgment or settlement occurs.

There can be no assurances as to the favorable outcome of any claim, lawsuit, investigation or proceeding. It is possible that a resolution of one or more such proceedings could require us to make substantial payments to satisfy judgments, fines or penalties or to settle claims or proceedings, any of which could materially adversely affect our results of operations and financial condition. These proceedings could also result in reputational harm, criminal sanctions, consent decrees or orders preventing us from offering certain services, requiring a change in our business practices in costly ways or requiring development of non-infringing or otherwise altered products or technologies. In addition, it can be very costly to defend litigation and these costs could materially adversely affect our results of operations and financial condition. See Note 15—Contingencies and Litigation to our Combined Financial Statements included elsewhere in this Information Statement.

Our results of operations and financial condition may be materially adversely affected by conditions abroad, including local economics, political environments, fluctuating foreign currencies and shifting regulatory schemes.

A portion of our revenues is generated from operations outside the United States. In addition, we maintain significant operations outside the United States. Our results of operations and financial condition could be materially adversely affected by changes in foreign currency exchange rates, as well as by a number of other factors, including, without limitation, changes in economic conditions from country to country, changes in a country’s political conditions, trade protection measures, licensing requirements, local tax issues, capitalization and other related legal matters. We generally hedge foreign currency denominated assets, liabilities and anticipated transactions primarily through the use of currency derivative contracts. The use of derivative contracts is intended to mitigate or reduce transactional level volatility in the results of foreign operations, but does not completely eliminate volatility. We do not hedge the translation effect of international revenues and expenses, which are denominated in currencies other than our U.S. parent functional currency, within our combined financial statements. If we are unable to effectively hedge these risks, our results of operations and financial condition could be materially adversely affected.

If we fail to successfully develop new service offerings, including new technology components, and protect our intellectual property rights, we may be unable to retain current customers and gain new customers and our revenues would decline.

The process of developing new service offerings, including new technology components, is inherently complex and uncertain. It requires accurate anticipation of customers’ changing needs and emerging technological trends. We must make long-term investments and commit significant resources before knowing whether these investments will eventually result in service offerings that achieve customer acceptance and generate the revenues required to provide desired returns. For example, establishing internal automation processes to help us develop new service offerings will require significant up-front costs and resources, which, if not monetized effectively, could materially adversely affect our revenues. In addition, some of our service offerings rely on technologies developed by and licensed from third parties. We may not be able to obtain or continue to obtain licenses and technologies from these third parties at all or on reasonable terms, or such third parties may demand cross-licenses to our intellectual property. It is also possible that our intellectual property rights could be challenged, invalidated or circumvented, allowing others to use our intellectual property to our competitive detriment. We also must ensure that all of our service offerings comply with both existing and newly enacted regulatory requirements in the countries in which they are sold. If we fail to accurately anticipate and meet our customers’ needs through the development of new service offerings (including technology components) or if we fail to adequately protect our intellectual property rights or if our new service offerings are not widely

 

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accepted or if our current or future service offerings fail to meet applicable worldwide regulatory requirements, we could lose market share and customers to our competitors and that could materially adversely affect our results of operations and financial condition.

Risks Relating to the Spin-Off

The Spin-Off could result in significant tax liability to Xerox and its shareholders.

Completion of the Spin-Off is conditioned on Xerox’s receipt of a written opinion of Cravath, Swaine & Moore LLP to the effect that the Distribution should qualify for non-recognition of gain and loss under Section 355 of the Code and the receipt and continuing effectiveness and validity of the IRS Ruling.

The opinion of counsel will not address any U.S. state or local or foreign tax consequences of the Spin-Off. The opinion will assume that the Spin-Off will be completed according to the terms of the Separation and Distribution Agreement and will rely on the facts as stated in the Separation and Distribution Agreement, the Tax Matters Agreement, the other ancillary agreements, this Information Statement and a number of other documents as well as the continuing effectiveness and validity of the IRS Ruling. In addition, the opinion will be based on certain representations as to factual matters from, and certain covenants by, Xerox and us. The opinion cannot be relied on if any of the assumptions, representations or covenants is incorrect, incomplete or inaccurate or is violated in any material respect.

Xerox has received the IRS Ruling. The IRS Ruling relies on certain facts, assumptions, representations and undertakings from Xerox and us regarding the past and future conduct of Xerox’s and our businesses and other matters. If any of these facts, assumptions, representations or undertakings is incorrect or not otherwise satisfied, Xerox may not be able to rely on the IRS Ruling. In addition, the IRS ruling is not a comprehensive ruling from the IRS regarding all aspects of the U.S. federal income tax consequences of the transactions.

Accordingly, notwithstanding the opinion of counsel and the IRS Ruling, there can be no assurance that the IRS will not assert, or that a court would not sustain, a contrary position.

If the Distribution were determined not to qualify for non-recognition of gain and loss for U.S. federal income tax purposes, U.S. Holders could be subject to tax. In this case, each U.S. Holder who receives our common stock in the Distribution would generally, for U.S. federal income tax purposes, be treated as receiving a distribution in an amount equal to the fair market value of our common stock received, which would generally result in (i) a taxable dividend to the U.S. Holder to the extent of that U.S. Holder’s pro rata share of Xerox’s current and accumulated earnings and profits; (ii) a reduction in the U.S. Holder’s basis (but not below zero) in Xerox common stock to the extent the amount received exceeds the shareholder’s share of Xerox’s earnings and profits; and (iii) a taxable gain from the exchange of Xerox common stock to the extent the amount received exceeds the sum of the U.S. Holder’s share of Xerox’s earnings and profits and the U.S. Holder’s basis in its Xerox common stock. See below and “The Spin-Off—Material U.S. Federal Income Tax Consequences of the Spin-Off.”

We could have an indemnification obligation to Xerox if the Distribution were determined not to qualify for non-recognition treatment, which could materially adversely affect our results of operations and financial condition.

If it were determined that the Distribution did not qualify for non-recognition of gain and loss under Section 355 of the Code, we could, under certain circumstances, be required to indemnify Xerox for the resulting taxes and related expenses. Any such indemnification obligation could materially adversely affect our results of operations and financial condition. For a description of such indemnification obligation, see “Certain Relationships and Related Party Transactions—Agreements with Xerox—Tax Matters Agreement.”

In addition, Section 355(e) of the Code generally creates a presumption that the Distribution would be taxable to Xerox, but not to shareholders, if we or our shareholders were to engage in transactions that result in a

 

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50% or greater change by vote or value in the ownership of our stock during the four-year period beginning on the date that begins two years before the date of the Distribution, unless it were established that such transactions and the Distribution were not part of a plan or series of related transactions giving effect to such a change in ownership. If the Distribution were taxable to Xerox due to such a 50% or greater change in ownership of our stock, Xerox would recognize gain equal to the excess of the fair market value of our common stock distributed to Xerox shareholders over Xerox’s tax basis in our common stock and we generally would be required to indemnify Xerox for the tax on such gain and related expenses. Any such indemnification obligation could materially adversely affect our results of operations and financial condition. See “Certain Relationships and Related Party Transactions—Agreements with Xerox—Tax Matters Agreement.”

We intend to agree to numerous restrictions to preserve the non-recognition treatment of the Distribution, which may reduce our strategic and operating flexibility.

We intend to agree in the Tax Matters Agreement to covenants and indemnification obligations that address compliance with Section 355 of the Code. These covenants and indemnification obligations may limit our ability to pursue strategic transactions or engage in new businesses or other transactions that may otherwise maximize the value of our business, and might discourage or delay a strategic transaction that our shareholders may consider favorable. See “Certain Relationships and Related Party Transactions—Agreements with Xerox—Tax Matters Agreement.”

We may be unable to achieve some or all of the benefits that we expect to achieve from the Spin-Off.

We believe that, as an independent, publicly traded company, we will be able to, among other things, design and implement corporate strategies and policies that are targeted to our business, better focus our financial and operational resources on our specific business, create effective incentives for our management and employees that are more closely tied to our business performance, provide investors more flexibility and enable us to achieve alignment with a more natural shareholder base and implement and maintain a capital structure designed to meet our specific needs. However, by separating from Xerox, we may be more susceptible to market fluctuations and other adverse events. As an independent entity, we will have an arm’s-length relationship with Xerox and we may not be able to obtain supplies from Xerox on terms as favorable to us as those we had as a wholly owned subsidiary of Xerox prior to the Spin-Off. As a smaller, independent company, Conduent will have a narrower business focus and may be more vulnerable to changing market conditions as well as the risk of takeover by third parties. In addition, we may be unable to achieve some or all of the benefits that we expect to achieve as an independent company in the time we expect, if at all. Furthermore, Xerox currently guarantees our and our subsidiaries’ performance under certain services contracts and real estate leases. Following the Spin-Off, we expect that Conduent will provide such performance guarantees, and we may be unable to retain or renew such contracts on terms and conditions as favorable to us as those currently in effect. A loss of such services contracts or real estate leases or a failure to renew such contracts or leases on favorable terms and conditions could materially adversely affect our results of operations and financial condition. The completion of the Spin-Off will also require significant amounts of our management’s time and effort, which may divert management’s attention from operating and growing our business. If we fail to achieve some or all of the benefits that we expect to achieve as an independent company, or do not achieve them in the time we expect, our results of operations and financial condition could be materially adversely affected.

We may be unable to make, on a timely or cost-effective basis, the changes necessary to operate as an independent, publicly traded company, and we may experience increased costs after the Spin-Off.

We have historically operated as part of Xerox’s corporate organization, and Xerox has provided us with various corporate functions. Following the Spin-Off, Xerox will have no obligation to provide us with assistance other than the transition services described under “Certain Relationships and Related Party Transactions—Transition Services Agreement.” These services do not include every service that we have received from Xerox in the past, and Xerox is only obligated to provide these services for limited periods following completion of the Spin-Off. Accordingly, following the Spin-Off, we will need to provide internally or obtain from unaffiliated

 

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third parties the services we currently receive from Xerox. These services include senior management, legal, human resources, finance and accounting, treasury, information technology, marketing and communications, internal audit and other shared services, the effective and appropriate performance of which are critical to our operations. We may be unable to replace these services in a timely manner or on terms and conditions as favorable as those we receive from Xerox. Because our business has most recently operated as part of the wider Xerox organization, we may be unable to successfully establish the infrastructure or implement the changes necessary to operate independently, or may incur additional costs that could adversely affect our business. If we fail to obtain the quality of services necessary to operate effectively or incur greater costs in obtaining these services, our results of operations and financial condition could be materially adversely affected.

We have no recent operating history as an independent, publicly traded company, and our historical and pro forma financial data are not necessarily representative of the results we would have achieved as an independent, publicly traded company and may not be a reliable indicator of our future results.

We derived the historical financial data included in this Information Statement from Xerox’s consolidated financial statements, and these data do not necessarily reflect the results of operations and financial condition we would have achieved as an independent, publicly traded company during the periods presented, or those that we will achieve in the future. This is primarily because of the following factors:

 

    Prior to the Spin-Off, we operated as part of Xerox’s broader corporate organization and Xerox performed various corporate functions for us, including, but not limited to, senior management, legal, human resources, finance and accounting, treasury, information technology, marketing and communications, internal audit and other shared services. Our historical financial data reflect allocations of corporate expenses from Xerox for these and similar functions. These allocations may not reflect the costs we will incur for similar services in the future as an independent, publicly traded company.

 

    We will enter into transactions with Xerox that did not exist prior to the Spin-Off, such as Xerox’s provision of transition services, which will cause us to incur new costs.

 

    Our historical financial data do not reflect changes that we expect to experience in the future as a result of our separation from Xerox. As part of Xerox, we enjoyed certain benefits from Xerox’s operating diversity, size, purchasing power, credit rating, borrowing leverage and available capital for investments, and we will lose these benefits after the Spin-Off. Many of our services contracts, particularly those for our transportation service offerings in our Public Sector business, require significant capital investments, and after the Spin-Off, we may not have access to the capital (from both internal and external sources) necessary to fund these services contracts. As an independent entity, we may be unable to purchase goods, services and technologies, such as insurance and health care benefits and computer software licenses, or access capital markets on terms as favorable to us as those we obtained as part of Xerox prior to the Spin-Off.

Following the Spin-Off, we will also be responsible for the additional costs associated with being an independent, publicly traded company, including costs related to corporate governance, investor and public relations and public reporting. For additional information about our past financial performance and the basis of presentation of our financial statements, see “Selected Historical Financial Data,” “Unaudited Pro Forma Combined Financial Statements,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our historical financial statements and the notes thereto included elsewhere in this Information Statement.

Some of the contracts to be transferred or assigned to us in connection with the Internal Transactions and Distribution contain provisions that require the consent of a third party to the Internal Transactions, the Distribution or both. Failure to obtain such consents on commercially reasonable and satisfactory terms may impair our entitlement to the benefit of these contracts in the future.

 

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We expect to incur new indebtedness concurrently with or prior to the Distribution, and the degree to which we will be leveraged following completion of the Distribution could materially adversely affect our results of operations and financial condition.

In connection with the Spin-Off, we expect to incur additional borrowings in order to redistribute debt between us and Xerox, such that we will have a total principal amount of debt of approximately $2,250 million immediately following the separation ($2,200 million of new borrowings plus approximately $50 million of existing debt). Approximately $1,905 million of the proceeds of the new borrowings will be transferred to Xerox prior to the consummation of the Spin-Off. We have historically relied upon Xerox for working capital requirements, including in connection with our previous acquisitions. After the Distribution, we will not be able to rely on the earnings, assets or cash flow of Xerox and Xerox will not provide funds to finance our working capital or other cash requirements. As a result, after the Distribution, we will be responsible for servicing our own debt and obtaining and maintaining sufficient working capital and other funds to satisfy our cash requirements. After the Spin-Off, our access to and cost of debt financing will be different from the historical access to and cost of debt financing under Xerox. Differences in access to and cost of debt financing may result in differences in the interest rate charged to us on financings, as well as the amount of indebtedness, types of financing structures and debt markets that may be available to us.

Our ability to make payments on and to refinance our indebtedness, including the debt incurred in connection with the Spin-Off, as well as any future debt that we may incur, will depend on our ability to generate cash in the future from operations, financings or asset sales. Our ability to generate cash is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control.

The terms of the new indebtedness we expect to incur concurrently with or prior to the Distribution will restrict our current and future operations, particularly our ability to incur debt that we may need to fund initiatives in response to changes in our business, the industries in which we operate, the economy and governmental regulations.

We expect that the terms of the indebtedness we expect to incur concurrently with or prior to the Distribution will include a number of restrictive covenants that impose significant operating and financial restrictions on us and our subsidiaries and limit our ability to engage in actions that may be in our long-term best interests. These may restrict our and our subsidiaries’ ability to take some or all of the following actions:

 

    incur or guarantee additional indebtedness or sell disqualified or preferred stock;

 

    pay dividends on, make distributions in respect of, repurchase or redeem, capital stock;

 

    make investments or acquisitions;

 

    sell, transfer or otherwise dispose of certain assets, including accounts receivable;

 

    create liens;

 

    enter into sale/leaseback transactions;

 

    enter into agreements restricting the ability to pay dividends or make other intercompany transfers;

 

    consolidate, merge, sell or otherwise dispose of all or substantially all of our or our subsidiaries’ assets;

 

    enter into transactions with affiliates;

 

    prepay, repurchase or redeem certain kinds of indebtedness;

 

    issue or sell stock of our subsidiaries; and/or

 

    significantly change the nature of our business.

As a result of all of these restrictions, we may be:

 

    limited in how we conduct our business and pursue our strategy;

 

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    unable to raise additional debt financing to operate during general economic or business downturns; or

 

    unable to compete effectively or to take advantage of new business opportunities.

A breach of any of these covenants, if applicable, could result in an event of default under the terms of this indebtedness. If an event of default occurs, the lenders would have the right to accelerate the repayment of such debt and the event of default or acceleration may result in the acceleration of the repayment of any other of our debt to which a cross-default or cross-acceleration provision applies. Furthermore, the lenders of this indebtedness may require that we pledge our assets as collateral as security for our repayment obligations. If we were unable to repay any amount of this indebtedness when due and payable, the lenders could proceed against the collateral that secures this indebtedness. In the event our creditors accelerate the repayment of our borrowings, we may not have sufficient assets to repay such indebtedness, which could materially adversely affect our results of operations and financial condition.

As part of Xerox, we currently receive favorable terms and prices from existing third-party vendors that we source products and services from based on the full purchasing power of Xerox. Following the Spin-Off, we will be a smaller company and may experience increased costs resulting from a decrease in purchasing power.

Prior to the Spin-Off, we have been able to take advantage of Xerox’s size and purchasing power in sourcing products and services from third-party vendors. Following the Spin-Off, we will be a smaller company and are unlikely to have the same purchasing power that we had as part of Xerox. Although we are seeking to expand our direct purchasing relationships with many of our most important third-party vendors, we may be unable to obtain products and services at prices and on terms as favorable as those available to us prior to the separation, which could increase our costs and reduce our profitability.

We may have been able to receive better terms from unaffiliated third parties than the terms we receive in our agreements with Xerox.

We will enter into agreements with Xerox related to our separation from Xerox, including the Separation and Distribution Agreement, Transition Services Agreement, Tax Matters Agreement, Employee Matters Agreement and any other agreements, while we are still part of Xerox. Accordingly, these agreements may not reflect terms that would have resulted from arm’s-length negotiations among unaffiliated third parties. The terms of these agreements will relate to, among other things, allocations of assets, liabilities, rights, indemnifications and other obligations between Xerox and us. We may have received better terms from third parties. See “Certain Relationships and Related Party Transactions—Agreements with Xerox.”

Risks Relating to Our Common Stock and the Securities Market

No market for our common stock currently exists and an active trading market may not develop or be sustained after the Spin-Off. Following the Spin-Off, our stock price may fluctuate significantly.

There is currently no public market for our common stock. We have applied to list our common stock on the New York Stock Exchange. We anticipate that before the Distribution Date, trading of shares of our common stock will begin on a “when-issued” basis and this trading will continue up to and including the Distribution Date. However, an active trading market for our common stock may not develop as a result of the Spin-Off or may not be sustained in the future. The lack of an active market may make it more difficult for shareholders to sell our shares and could lead to our share price being depressed or volatile.

We cannot predict the prices at which our common stock may trade after the Spin-Off. The market price of our common stock may fluctuate widely, depending on many factors, some of which may be beyond our control, including:

 

    actual or anticipated fluctuations in our results of operations or financial condition due to factors related to our business;

 

    success or failure of our business strategies;

 

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    our quarterly or annual earnings, or those of other companies in our industry;

 

    our level of indebtedness, our ability to make payments on or service our indebtedness and our ability to obtain financing as needed;

 

    changes in accounting standards, policies, guidance, interpretations or principles;

 

    the failure of securities analysts to cover our common stock after the Spin-Off;

 

    changes in earnings estimates by securities analysts or our ability to meet those estimates;

 

    the operating and stock price performance of other comparable companies;

 

    investor perception of our company and the business process outsourcing industry;

 

    overall market fluctuations;

 

    results from any material litigation or government investigation;

 

    changes in laws and regulations (including tax laws and regulations) affecting our business;

 

    changes in capital gains taxes and taxes on dividends affecting shareholders; and

 

    general economic conditions and other external factors.

Furthermore, our business profile and market capitalization may not fit the investment objectives of some Xerox shareholders and, as a result, those Xerox shareholders may sell their shares of our common stock after the Distribution. See “—Substantial sales of our common stock may occur in connection with the Spin-Off, which could cause our stock price to decline.” Low trading volume for our stock, which may occur if an active trading market does not develop, among other reasons, would amplify the effect of the above factors on our stock price volatility.

Stock markets in general have experienced volatility that has often been unrelated to the operating performance of a particular company. These broad market fluctuations could adversely affect the trading price of our common stock.

Substantial sales of our common stock may occur in connection with the Spin-Off, which could cause our stock price to decline.

Xerox shareholders receiving shares of our common stock in the Distribution generally may sell those shares immediately in the public market. It is likely that some Xerox shareholders, including some of its larger shareholders, will sell their shares of our common stock received in the Distribution if, for reasons such as our business profile or market capitalization as an independent company, we do not fit their investment objectives, or—in the case of index funds—we are not a participant in the index in which they are investing. The sales of significant amounts of our common stock, or the perception in the market that this will occur, may decrease the market price of our common stock.

We do not anticipate paying any dividends on our common stock for the foreseeable future, and as a result, your only opportunity to achieve a return on your investment is if the price of our common stock appreciates.

We do not anticipate paying any dividends on our common stock for the foreseeable future. We intend to retain future earnings for use in the operation of our business and to fund future growth. Following the Spin-Off, the timing, declaration, amount and payment of future dividends, if any, to shareholders will fall within the discretion of our Board. Our Board’s decisions regarding the payment of future dividends, if any, will depend on many factors, including our financial condition, earnings, capital requirements of our business and covenants associated with debt obligations, as well as legal requirements, regulatory constraints, industry practice and other factors that our Board deems relevant. As a result, capital appreciation, if any, of our common stock will be your sole source of potential gain for the foreseeable future.

 

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Your percentage ownership in Conduent may be diluted in the future.

Your percentage ownership in Conduent may be diluted in the future because of equity awards that we expect to grant to our directors, officers and other employees. Prior to completion of the Spin-Off, we expect to approve an incentive plan that will provide for the grant of common stock-based equity awards to our directors, officers and other employees. In addition, we may issue equity as all or part of the consideration paid for acquisitions and strategic investments that we may make in the future or as necessary to finance our ongoing operations.

Certain provisions in our Restated Certificate of Incorporation and in our Amended and Restated By-Laws and New York law may discourage takeovers.

Several provisions of our Restated Certificate of Incorporation, Amended and Restated By-Laws and New York law may discourage, delay or prevent a merger or acquisition that is opposed by our Board. These include provisions that:

 

    permit us to issue blank check preferred stock as more fully described under “Description of Our Capital Stock—Certain Provisions of New York Law, Our Restated Certificate of Incorporation and Amended and Restated By-Laws”;

 

    provide that only the Chairman of the Board, the Board or the Secretary, at the request of the holders of record of not less than 20% of the outstanding shares of the common stock of Conduent will be able to call a special meeting of shareholders;

 

    establish advance notice requirements for shareholder nominations and proposals; and

 

    limit our ability to enter into business combination transactions with certain stockholders.

These and other provisions of our Restated Certificate of Incorporation, Amended and Restated By-Laws and New York law may discourage, delay or prevent certain types of transactions involving an actual or a threatened acquisition or change in control of Conduent, including unsolicited takeover attempts, even though the transaction may offer our shareholders the opportunity to sell their shares of our common stock at a price above the prevailing market price. See “Description of Our Capital Stock—Certain Provisions of New York Law, Our Restated Certificate of Incorporation and Amended and Restated By-Laws” for more information.

Our Restated Certificate of Incorporation will designate the state and federal courts located in New York County in the State of New York as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our shareholders, which could limit our shareholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or other employees.

Our Restated Certificate of Incorporation will provide that unless we consent in writing to the selection of an alternative forum, any state or federal court located in New York County in the State of New York will be the sole and exclusive forum for (i) any derivative action or proceeding purportedly brought on behalf of Conduent, (ii) any action or proceeding asserting a claim of breach of a fiduciary duty owed by any current or former director, officer or other employee or shareholder of the Conduent to Conduent or Conduent’s shareholders, (iii) any action or proceeding asserting a claim arising pursuant to any provision of the Business Corporation Law of the State of New York or Conduent’s Certificate of Incorporation or Conduent’s By-Laws (with respect to each, as may be amended from time to time), or (iv) any action or proceeding asserting a claim otherwise governed by the internal affairs doctrine. Any person holding, purchasing or otherwise acquiring any interest in shares of capital stock of Conduent will be deemed to have notice of and consented to this provision and deemed to have waived any argument relating to the inconvenience of the forum in connection with any action or proceeding described in this provision. This provision may limit a shareholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits. Alternatively, if a court were to find this provision of our Restated Certificate of Incorporation inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions.

 

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CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

This Information Statement contains “forward-looking statements” that involve risks and uncertainties. These statements can be identified by the fact that they do not relate strictly to historical or current facts, but rather are based on current expectations, estimates, assumptions and projections about the business process outsourcing industry and our business and financial results. Forward-looking statements often include words such as “anticipates,” “estimates,” “expects,” “projects,” “intends,” “plans,” “believes” and words and terms of similar substance in connection with discussions of future operating or financial performance. As with any projection or forecast, forward-looking statements are inherently susceptible to uncertainty and changes in circumstances. Our actual results may vary materially from those expressed or implied in our forward-looking statements. Accordingly, undue reliance should not be placed on any forward-looking statement made by us or on our behalf. Important factors that could cause our actual results to differ materially from those in our forward-looking statements include government regulation, economic, strategic, political and social conditions and the following factors, among others:

 

    competitive pressures;

 

    changes in interest in outsourced business process services;

 

    our ability to obtain adequate pricing for our services and to improve our cost structure;

 

    the effects of any acquisitions, joint ventures and divestitures by us;

 

    our ability to attract and retain key employees;

 

    our ability to attract and retain necessary technical personnel and qualified subcontractors;

 

    a decline in revenues from or a loss or failure of significant clients;

 

    our ability to estimate the scope of work or the costs of performance in our contracts;

 

    the failure to comply with laws relating to individually identifiable information and personal health information and laws relating to processing certain financial transactions, including payment card transactions and debit or credit card transactions;

 

    our ability to deliver on our contractual obligations properly and on time;

 

    our ability to renew commercial and government contracts awarded through competitive bidding processes;

 

    increases in the cost of telephone and data services or significant interruptions in such services;

 

    changes in tax and other laws and regulations;

 

    changes in U.S. GAAP or other applicable accounting policies; and

 

    the other risks and uncertainties detailed in the section titled “Risk Factors.”

Any forward-looking statements made by us in this Information Statement speak only as of the date on which they are made. We are under no obligation to, and expressly disclaim any obligation to, update or alter our forward-looking statements, whether as a result of new information, subsequent events or otherwise.

 

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THE SPIN-OFF

Background

On January 29, 2016, Xerox announced plans for the complete legal and structural separation of the BPO Business from Xerox. To effect the separation, Xerox is undertaking the Internal Transactions described under “Certain Relationships and Related Party Transactions—Agreements with Xerox—Separation and Distribution Agreement.”

Following the Internal Transactions, Xerox will distribute all of its equity interest in us, consisting of all of the outstanding shares of our common stock, to holders of Xerox’s common stock on a pro rata basis. Following the Spin-Off, Xerox will not own any equity interest in us, and we will operate independently from Xerox. No approval of Xerox’s shareholders is required in connection with the Spin-Off, and Xerox’s shareholders will not have any appraisal rights in connection with the Spin-Off.

Completion of the Spin-Off is subject to the satisfaction, or the Xerox Board’s waiver, of a number of conditions. In addition, Xerox has the right not to complete the Spin-Off if, at any time, the Xerox Board determines, in its sole and absolute discretion, that the Spin-Off is not in the best interests of Xerox or its shareholders or is otherwise not advisable. For a more detailed description, see “—Conditions to the Spin-Off.”

Reasons for the Spin-Off

In October 2015, the Xerox Board authorized a review of Xerox’s business portfolio and capital allocation options, with the goal of enhancing shareholder value. In reaching the decision to create two independent public companies, Xerox considered a range of potential structural alternatives and concluded that the creation of two independent public companies is the most attractive alternative for enhancing shareholder value. As part of this evaluation, Xerox considered a number of factors, including the strategic clarity and flexibility for Xerox and Conduent after the Spin-Off, the ability of Conduent to compete and operate efficiently and effectively (including Conduent’s ability to retain and attract management talent) after the Spin-Off, the financial profile of Conduent and the potential reaction of investors.

As a result of this evaluation, Xerox determined that proceeding with the Spin-Off would be in the best interests of Xerox and its shareholders. Xerox considered the following potential benefits of this approach:

 

    Enhanced Strategic and Operational Focus. Following the Spin-Off, Xerox and Conduent will each have a more focused business and be better able to dedicate financial, management and other resources to leverage its areas of strength and differentiation. Each company will pursue appropriate growth opportunities and execute strategic plans best suited to address the distinct market trends and opportunities for its business. Conduent plans to focus on leadership in attractive market segments, invest selectively in growth areas, ensure continued operational discipline and capture transformative productivity.

 

    Simplified Organizational Structure and Resources. The Spin-Off will allow the management of each of Xerox and Conduent to devote its time and attention to the development and implementation of corporate strategies and policies that are based primarily on the specific business characteristics of their respective companies. Each company will be able to adapt faster to clients’ changing needs, address specific market dynamics, target innovation and investments in select growth areas and accelerate decision-making processes.

 

    Distinct and Clear Financial Profiles and Compelling Investment Cases. Investment in one or the other company may appeal to investors with different goals, interests and concerns. The Spin-Off will allow investors to make independent investment decisions with respect to Xerox and Conduent and may result in greater alignment between the interests of Conduent’s shareholder base and the characteristics of Conduent’s business, capital structure and financial results.

 

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    Performance Incentives. The Spin-Off will enable Conduent to create incentives for its management and employees that are more closely tied to its business performance and shareholder expectations. Conduent’s equity-based compensation arrangements will more closely align the interests of Conduent’s management and employees with the interests of its shareholders and should increase Conduent’s ability to attract and retain personnel.

 

    Capital Structure. The Spin-Off will enable each of Xerox and Conduent to leverage its distinct growth profile and cash flow characteristics to optimize its capital structure and capital allocation strategy.

In determining whether to effect the Spin-Off, Xerox considered the costs and risks associated with the transaction, including the costs associated with preparing Conduent to become an independent, publicly traded company, the risk of volatility in our stock price immediately following the Spin-Off due to sales by Xerox’s shareholders whose investment objectives may not be met by our common stock, the time it may take for us to attract our optimal shareholder base, the possibility of disruptions in our business as a result of the Spin-Off, the risk that the combined trading prices of our common stock and Xerox’s common stock after the Spin-Off may drop below the trading price of Xerox’s common stock before the Spin-Off and the loss of synergies and scale from operating as one company. Notwithstanding these costs and risks, taking into account the factors discussed above, Xerox determined that the Spin-Off provided the best opportunity to achieve the above benefits and enhance shareholder value.

When and How You Will Receive Conduent Shares

Xerox will distribute to its shareholders, as a pro rata dividend, one share of our common stock for every five shares of Xerox common stock outstanding as of December 15, 2016, the Record Date of the Distribution.

Prior to the Distribution, Xerox will deliver all of the issued and outstanding shares of our common stock to the distribution agent. Computershare Trust Company, N.A. will serve as distribution agent in connection with the Distribution and as transfer agent and registrar for our common stock.

If you own Xerox common stock as of the close of business on December 15, 2016, the shares of our common stock that you are entitled to receive in the Distribution will be issued to your account as follows:

 

    Registered shareholders. If you own your shares of Xerox common stock directly through Xerox’s transfer agent, Computershare Trust Company, N.A., you are a registered shareholder. In this case, the distribution agent will credit the whole shares of our common stock you receive in the Distribution by way of direct registration in book-entry form to a new account with our transfer agent. Registration in book-entry form refers to a method of recording share ownership where no physical stock certificates are issued to shareholders, as is the case in the Distribution. You will be able to access information regarding your book-entry account holding the Conduent shares at www.computershare.com/investor or by calling 800-446-2617.

Commencing on or shortly after the Distribution Date, the distribution agent will mail to you an account statement that indicates the number of whole shares of our common stock that have been registered in book-entry form in your name. We expect it will take the distribution agent up to two weeks after the Distribution Date to complete the distribution of the shares of our common stock and mail statements of holding to all registered shareholders.

 

    Street nameor beneficial shareholders. If you own your shares of Xerox common stock beneficially through a bank, broker or other nominee, the bank, broker or other nominee holds the shares in “street name” and records your ownership on its books. In this case, your bank, broker or other nominee will credit your account with the whole shares of our common stock that you receive in the Distribution on or shortly after the Distribution Date. We encourage you to contact your bank, broker or other nominee if you have any questions concerning the mechanics of having shares held in “street name.”

 

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If you sell any of your shares of Xerox common stock on or before the Distribution Date, the buyer of those shares may in some circumstances be entitled to receive the shares of our common stock to be distributed in respect of the Xerox shares you sold. See “—Trading Prior to the Distribution Date” for more information.

We are not asking Xerox shareholders to take any action in connection with the Spin-Off. We are not asking you for a proxy and request that you not send us a proxy. We are also not asking you to make any payment or surrender or exchange any of your shares of Xerox common stock for shares of our common stock. The number of outstanding shares of Xerox common stock will not change as a result of the Spin-Off.

Number of Shares You Will Receive

On the Distribution Date, you will receive one share of our common stock for every five shares of Xerox common stock you owned as of the Record Date.

Treatment of Fractional Shares

The distribution agent will not distribute any fractional shares of our common stock in connection with the Spin-Off. Instead, the distribution agent will aggregate all fractional shares into whole shares and sell the whole shares in the open market at prevailing market prices on behalf of Xerox shareholders entitled to receive a fractional share. The distribution agent will then distribute the aggregate cash proceeds of the sales, net of brokerage fees and other costs, pro rata to these holders (net of any required withholding for taxes applicable to each holder). We anticipate that the distribution agent will make these sales in the “when-issued” market, and “when-issued” trades will generally settle within four trading days following the Distribution Date. See “—Trading Prior to the Distribution Date” for additional information regarding “when-issued” trading. The distribution agent will, in its sole discretion, without any influence by Xerox or us, determine when, how, through which broker-dealer and at what price to sell the whole shares. The distribution agent is not, and any broker-dealer used by the distribution agent will not be, an affiliate of either Xerox or us.

The distribution agent will send to each registered holder of Xerox common stock entitled to a fractional share a check in the cash amount deliverable in lieu of that holder’s fractional share as soon as practicable following the Distribution Date. We expect the distribution agent to take about two weeks after the Distribution Date to complete the distribution of cash in lieu of fractional shares to Xerox shareholders. If you hold your shares through a bank, broker or other nominee, your bank, broker or nominee will receive, on your behalf, your pro rata share of the aggregate net cash proceeds of the sales. No interest will be paid on any cash you receive in lieu of a fractional share. The cash you receive in lieu of a fractional share will generally be taxable to you for U.S. federal income tax purposes. See “—Material U.S. Federal Income Tax Consequences of the Spin-Off” below for more information.

Material U.S. Federal Income Tax Consequences of the Spin-Off

Consequences to U.S. Holders of Xerox Common Stock

The following is a summary of the material U.S. federal income tax consequences to holders of Xerox common stock in connection with the Distribution. This summary is based on the Code, the Treasury Regulations promulgated under the Code and judicial and administrative interpretations of those laws, in each case as in effect and available as of the date of this Information Statement and all of which are subject to change at any time, possibly with retroactive effect. Any such change could affect the tax consequences described below.

This summary is limited to holders of Xerox common stock that are U.S. Holders, as defined immediately below, that hold their Xerox common stock as a capital asset. A “U.S. Holder” is a beneficial owner of Xerox common stock that is, for U.S. federal income tax purposes:

 

    an individual who is a citizen or a resident of the United States;

 

    a corporation, or other entity taxable as a corporation for U.S. federal income tax purposes, created or organized under the laws of the United States or any state thereof or the District of Columbia;

 

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    an estate, the income of which is subject to U.S. federal income taxation regardless of its source; or

 

    a trust if (i) a court within the United States is able to exercise primary jurisdiction over its administration and one or more U.S. persons have the authority to control all of its substantial decisions or (ii) in the case of a trust that was treated as a domestic trust under law in effect before 1997, a valid election is in place under applicable Treasury Regulations.

This summary does not discuss all tax considerations that may be relevant to shareholders in light of their particular circumstances, nor does it address the consequences to shareholders subject to special treatment under the U.S. federal income tax laws, such as:

 

    dealers or traders in securities or currencies;

 

    tax-exempt entities;

 

    banks, financial institutions or insurance companies;

 

    real estate investment trusts, regulated investment companies or grantor trusts;

 

    persons who acquired Xerox common stock pursuant to the exercise of employee stock options or otherwise as compensation;

 

    shareholders who own, or are deemed to own, 10% or more, by voting power or value, of Xerox equity;

 

    shareholders owning Xerox common stock as part of a position in a straddle or as part of a hedging, conversion or other risk reduction transaction for U.S. federal income tax purposes;

 

    certain former citizens or long-term residents of the United States;

 

    shareholders who are subject to the alternative minimum tax;

 

    persons who own Xerox common stock through partnerships or other pass-through entities; or

 

    persons who hold Xerox common stock through a tax-qualified retirement plan.

This summary does not address any U.S. state or local or foreign tax consequences or any estate, gift or other non-income tax consequences.

If a partnership, or any other entity treated as a partnership for U.S. federal income tax purposes, holds Xerox common stock, the tax treatment of a partner in that partnership will generally depend on the status of the partner and the activities of the partnership. Such a partner or partnership is urged to consult its own tax advisor as to its tax consequences.

YOU ARE URGED TO CONSULT YOUR OWN TAX ADVISOR WITH RESPECT TO THE U.S. FEDERAL, STATE AND LOCAL AND FOREIGN TAX CONSEQUENCES OF THE DISTRIBUTION.

General

Completion of the Spin-Off is conditioned upon Xerox’s receipt of a written opinion of Cravath, Swaine & Moore LLP, counsel to Xerox, to the effect that the Distribution should qualify for nonrecognition of gain and loss under Section 355 of the Code and upon the receipt and continuing effectiveness and validity of the IRS Ruling. If the Distribution qualifies for this treatment and subject to the qualifications and limitations set forth herein (including the discussion below relating to the receipt of cash in lieu of fractional shares), for U.S. federal income tax purposes:

 

    no gain or loss should be recognized by, or be includible in the income of, a U.S. Holder as a result of the Distribution, except with respect to any cash received in lieu of fractional shares;

 

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    the aggregate tax basis of the Xerox common stock and our common stock held by each U.S. Holder immediately after the Distribution should be the same as the aggregate tax basis of the Xerox common stock held by the U.S. Holder immediately before the Distribution, allocated between the Xerox common stock and our common stock in proportion to their relative fair market values on the date of the Distribution (subject to reduction upon the deemed sale of any fractional shares, as described below); and

 

    the holding period of our common stock received by each U.S. Holder should include the holding period of its Xerox common stock, provided that such Xerox common stock is held as a capital asset on the date of the Distribution.

U.S. Holders that have acquired different blocks of Xerox common stock at different times or at different prices are urged to consult their tax advisors regarding the allocation of their aggregate adjusted tax basis among, and the holding period of, shares of our common stock distributed with respect to such blocks of Xerox common stock.

If a U.S. Holder receives cash in lieu of a fractional share of common stock as part of the Distribution, the U.S. Holder will be treated as though it first received a distribution of the fractional share in the Distribution and then sold it for the amount of cash actually received. Provided the fractional share is considered to be held as a capital asset on the date of the Distribution, the U.S. Holder will generally recognize capital gain or loss measured by the difference between the cash received for such fractional share and the U.S. Holder’s tax basis in that fractional share, as determined above. Such capital gain or loss will be long-term capital gain or loss if the U.S. Holder’s holding period for the Xerox common stock is more than one year on the date of the Distribution.

The opinion of counsel will not address any U.S. state or local or foreign tax consequences of the Spin-Off. The opinion will assume that the Spin-Off will be completed according to the terms of the Separation and Distribution Agreement and will rely on the facts as stated in the Separation and Distribution Agreement, the Tax Matters Agreement, the other ancillary agreements, this Information Statement and a number of other documents. In addition, the opinion will be based on certain representations as to factual matters from, and certain covenants by, Xerox and us as well as the continuing effectiveness and validity of the IRS Ruling. The opinion cannot be relied on if any of the assumptions, representations or covenants are incorrect, incomplete or inaccurate or are violated in any material respect.

Xerox has received the IRS Ruling. The IRS Ruling relies on certain facts, assumptions, representations and undertakings from Xerox and us regarding the past and future conduct of Xerox’s and our businesses and other matters. If any of these facts, assumptions, representations or undertakings are incorrect or not otherwise satisfied, Xerox may not be able to rely on the IRS Ruling. In addition, the IRS Ruling is not a comprehensive ruling from the IRS regarding all aspects of the U.S. federal income tax consequences of the transactions.

Accordingly, notwithstanding the opinion of counsel and the IRS Ruling, there can be no assurance that the IRS will not assert, or that a court would not sustain, a position contrary to one or more of the conclusions set forth above.

If the Distribution were determined not to qualify for non-recognition of gain and loss, the above consequences would not apply and U.S. Holders could be subject to tax. In this case, each U.S. Holder who receives our common stock in the Distribution would generally be treated as receiving a distribution in an amount equal to the fair market value of our common stock received, which would generally result in:

 

    a taxable dividend to the U.S. Holder to the extent of that U.S. Holder’s pro rata share of Xerox’s current and accumulated earnings and profits;

 

    a reduction in the U.S. Holder’s basis (but not below zero) in Xerox common stock to the extent the amount received exceeds the shareholder’s share of Xerox’s earnings and profits; and

 

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    a taxable gain from the exchange of Xerox common stock to the extent the amount received exceeds the sum of the U.S. Holder’s share of Xerox’s earnings and profits and the U.S. Holder’s basis in its Xerox common stock.

Backup Withholding and Information Statement

Payments of cash in lieu of a fractional share of our common stock may, under certain circumstances, be subject to “backup withholding,” unless a U.S. Holder provides proof of an applicable exemption or a correct taxpayer identification number, and otherwise complies with the requirements of the backup withholding rules. Corporations will generally be exempt from backup withholding, but may be required to provide a certification to establish their entitlement to the exemption. Backup withholding is not an additional tax, and it may be refunded or credited against a U.S. Holder’s U.S. federal income tax liability if the required information is timely supplied to the IRS.

Treasury Regulations require each Xerox shareholder that, immediately before the Distribution, owned 5% or more (by vote or value) of the total outstanding stock of Xerox to attach to such shareholder’s U.S. federal income tax return for the year in which the Distribution occurs a statement setting forth certain information related to the Distribution.

Consequences to Xerox

The following is a summary of the material U.S. federal income tax consequences to Xerox in connection with the Spin-Off that may be relevant to holders of Xerox common stock.

As discussed above, completion of the Spin-Off is conditioned upon Xerox’s receipt of a written opinion of Cravath, Swaine & Moore LLP, counsel to Xerox, to the effect that the Distribution should qualify for non-recognition of gain and loss under Section 355 of the Code and the receipt and continuing effectiveness and validity of the IRS Ruling. If the Distribution qualifies for nonrecognition of gain and loss under Section 355 of the Code, no gain or loss should be recognized by Xerox as a result of the Distribution (other than income or gain arising from any imputed income or other adjustment to Xerox, us or our respective subsidiaries if and to the extent that the Separation and Distribution Agreement or any ancillary agreement is determined to have terms that are not at arm’s length). The opinion of counsel and IRS Ruling are subject to the qualifications and limitations as are set forth above under “—Consequences to U.S. Holders of Xerox Common Stock.”

If the Distribution were determined not to qualify for non-recognition of gain and loss under Section 355 of the Code, then Xerox would recognize gain equal to the excess of the fair market value of our common stock distributed to Xerox shareholders over Xerox’s tax basis in our common stock.

Indemnification Obligation

If it were determined that the Distribution did not qualify for non-recognition of gain and loss under Section 355 of the Code, we could, under certain circumstances, be required to indemnify Xerox for taxes resulting from the recognition of gain described above and related expenses. In addition, current tax law generally creates a presumption that the Distribution would be taxable to Xerox, but not to holders, if we or our shareholders were to engage in transactions that result in a 50% or greater change by vote or value in the ownership of our stock during the four-year period beginning on the date that begins two years before the date of the Distribution, unless it were established that such transactions and the Distribution were not part of a plan or series of related transactions giving effect to such a change in ownership. If the Distribution were taxable to Xerox due to such a 50% or greater change in ownership of our stock, Xerox would recognize gain equal to the excess of the fair market value of our common stock distributed to Xerox shareholders over Xerox’s tax basis in our common stock and we generally would be required to indemnify Xerox for the tax on such gain and related expenses. For a description of our indemnification obligations, see “Certain Relationships and Related Party Transactions—Agreements with Xerox—Tax Matters Agreement.”

 

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Results of the Spin-Off

After the Spin-Off, we will be an independent, publicly traded company. Immediately following the Spin-Off, we expect to have approximately 208,843 beneficial holders of shares of our common stock and approximately 202,795,510 shares of our common stock outstanding, based on the number of Xerox shareholders and shares of Xerox common stock outstanding on October 31, 2016. The actual number of shares of our common stock Xerox will distribute in the Spin-Off will depend on the actual number of shares of Xerox common stock outstanding on the Record Date, which will reflect any issuance of new shares or exercises of outstanding options pursuant to Xerox’s equity plans, and any repurchase of Xerox shares by Xerox under its common stock repurchase program, on or prior to the Record Date. The Spin-Off will not affect the number of outstanding shares of Xerox common stock or any rights of Xerox shareholders, although we expect the trading price of shares of Xerox common stock immediately following the Distribution to be lower than immediately prior to the Distribution because the trading price of Xerox common stock will no longer reflect the value of the BPO Business.

Before our separation from Xerox, we intend to enter into a Separation and Distribution Agreement and several other agreements with Xerox related to the Spin-Off. These agreements will govern the relationship between us and Xerox up to and after completion of the Spin-Off and allocate between us and Xerox various assets, liabilities, rights and obligations, including employee benefits, intellectual property and tax-related assets and liabilities. We describe these arrangements in greater detail under “Certain Relationships and Related Party Transactions—Agreements with Xerox.”

Listing and Trading of our Common Stock

As of the date of this Information Statement, we are a wholly owned subsidiary of Xerox. Accordingly, no public market for our common stock currently exists, although a “when-issued” market in our common stock may develop prior to the Distribution. See “—Trading Prior to the Distribution Date” below for an explanation of a “when-issued” market. We intend to list our shares of common stock on the New York Stock Exchange under the symbol “CNDT.”

Neither we nor Xerox can assure you as to the trading price of Xerox common stock or our common stock after the Spin-Off, or as to whether the combined trading prices of our common stock and the Xerox common stock after the Spin-Off will be less than, equal to or greater than the trading prices of Xerox common stock prior to the Spin-Off. The trading price of our common stock may fluctuate significantly following the Spin-Off. See “Risk Factors—Risks Relating to Our Common Stock and the Securities Market” for more detail.

The shares of our common stock distributed to Xerox shareholders will be freely transferable, except for shares received by individuals who are our affiliates. Individuals who may be considered our affiliates after the Spin-Off include individuals who control, are controlled by or are under common control with us, as those terms generally are interpreted for federal securities law purposes. These individuals may include some or all of our directors and executive officers. Individuals who are our affiliates will be permitted to sell their shares of our common stock only pursuant to an effective registration statement under the Securities Act of 1933, as amended (the “Securities Act”), or an exemption from the registration requirements of the Securities Act, such as those afforded by Section 4(a)(1) of the Securities Act or Rule 144 thereunder.

Trading Prior to the Distribution Date

We expect a “when-issued” market in our common stock to develop as early as two trading days prior to the Record Date for the Distribution and continue up to and including the Distribution Date. “When-issued” trading refers to a sale or purchase made conditionally on or before the Distribution Date because the securities of the spun-off entity have not yet been distributed. If you own shares of Xerox common stock on the Record Date, you will be entitled to receive shares of our common stock in the Distribution. You may trade this entitlement to receive shares of our common stock, without the shares of Xerox common stock you own, on the “when-issued” market. We expect “when-issued” trades of our common stock to settle within four trading days after the Distribution Date. On the first trading day following the Distribution Date, we expect that “when-issued” trading of our common stock will end and “regular-way” trading will begin.

 

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We also anticipate that, as early as two trading days prior to the Record Date and continuing up to and including the Distribution Date, there will be two markets in Xerox common stock: a “regular-way” market and an “ex-distribution” market. Shares of Xerox common stock that trade on the regular-way market will trade with an entitlement to receive shares of our common stock in the Distribution. Shares that trade on the ex-distribution market will trade without an entitlement to receive shares of our common stock in the Distribution. Therefore, if you sell shares of Xerox common stock in the regular-way market up to and including the Distribution Date, you will be selling your right to receive shares of our common stock in the Distribution. However, if you own shares of Xerox common stock on the Record Date and sell those shares on the ex-distribution market up to and including the Distribution Date, you will still receive the shares of our common stock that you would otherwise be entitled to receive in the Distribution.

Following the Distribution Date, we expect shares of our common stock to be listed on the New York Stock Exchange under the trading symbol “CNDT.” If “when-issued” trading occurs, the listing for our common stock is expected to be under a trading symbol different from our “regular-way” trading symbol. We will announce our “when-issued” trading symbol when and if it becomes available. If the Spin-Off does not occur, all “when-issued” trading will be null and void.

Conditions to the Spin-Off

We expect that the Separation will be effective on the Distribution Date, provided that the following conditions shall have been satisfied or waived by Xerox:

 

    the Xerox Board shall have authorized and approved the Internal Transactions and Distribution and not withdrawn such authorization and approval, and shall have declared the dividend of our common stock to Xerox shareholders;

 

    the ancillary agreements contemplated by the Separation and Distribution Agreement shall have been executed by each party to those agreements;

 

    our common stock shall have been accepted for listing on the New York Stock Exchange or another national securities exchange approved by Xerox, subject to official notice of issuance;

 

    the SEC shall have declared effective our Registration Statement on Form 10, of which this Information Statement is a part, under the Exchange Act, and no stop order suspending the effectiveness of the Registration Statement shall be in effect and no proceedings for that purpose shall be pending before or threatened by the SEC;

 

    Xerox shall have received the written opinion of Cravath, Swaine & Moore LLP, which shall remain in full force and effect, that, subject to the accuracy of and compliance with certain representations, warranties and covenants, the Distribution should qualify for non-recognition of gain and loss under Section 355 of the Code;

 

    Xerox shall have received the IRS Ruling, and the IRS Ruling shall continue to be effective and valid;

 

    the Internal Transactions (as described in “Certain Relationships and Related Party Transactions—Agreements with Xerox—Separation and Distribution Agreement”) shall have been completed;

 

    no order, injunction or decree issued by any governmental authority of competent jurisdiction or other legal restraint or prohibition preventing consummation of the Distribution shall be in effect, and no other event outside the control of Xerox shall have occurred or failed to occur that prevents the consummation of the Distribution;

 

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    no other events or developments shall have occurred prior to the Distribution Date that, in the judgment of the Xerox Board, would result in the Distribution having a material adverse effect on Xerox or its shareholders;

 

    prior to the Distribution Date, notice of Internet availability of this Information Statement or this Information Statement shall have been mailed to the holders of Xerox common stock as of the Record Date;

 

    Xerox shall have duly elected the individuals to be listed as members of our post-Distribution Board in this Information Statement, and such individuals shall be the members of our Board immediately after the Distribution; provided that our current directors shall appoint one independent director prior to the date on which “when-issued” trading of our common stock commences on the New York Stock Exchange and such director shall serve on our Audit Committee, Compensation Committee and Corporate Governance Committee; and

 

    immediately prior to the Distribution Date, our Restated Certificate of Incorporation and Amended and Restated By-Laws, each in substantially the form filed as an exhibit to the Registration Statement on Form 10 of which this Information Statement is a part, shall be in effect.

The fulfillment of the above conditions will not create any obligation on Xerox’s part to complete the Spin-Off. We are not aware of any material federal, foreign or state regulatory requirements with which we must comply, other than SEC rules and regulations, or any material approvals that we must obtain, other than the approval for listing of our common stock and the SEC’s declaration of the effectiveness of the Registration Statement, in connection with the Distribution. Xerox has the right not to complete the Spin-Off if, at any time, the Xerox Board determines, in its sole and absolute discretion, that the Spin-Off is not in the best interests of Xerox or its shareholders or is otherwise not advisable.

Under the Icahn Agreement, if the Spin-Off has not occurred by December 31, 2016, Xerox must call its 2017 annual shareholders meeting to be held no later than March 31, 2017, at which meeting any shareholder of Xerox that has delivered written notice, which includes the information required by Xerox’s by-laws, to Xerox on or prior to January 31, 2017 shall be permitted to nominate directors of Xerox and/or propose other business. However, if the Spin-Off occurs on or before March 30, 2017 (even if it did not occur by December 31, 2016), then Xerox will not be required to hold its 2017 annual shareholders meeting by March 31, 2017.

Treatment of Xerox Preferred Stock in the Spin-Off

Xerox Series A Preferred Stock

As of October 27, 2016, there were 300,000 shares of Xerox Series A Preferred Stock outstanding, all of which were held by Mr. Deason.

Exchange Agreement

On October 27, 2016, Xerox and Conduent entered into the Exchange Agreement with Mr. Deason. Pursuant to the terms of the Exchange Agreement, subject to the completion of the Spin-Off, among other conditions, Xerox will transfer 180,000 shares of Xerox Series B Preferred Stock and 120,000 shares of Conduent Series A Preferred Stock to Mr. Deason in exchange for all of Mr. Deason’s shares of Xerox Series A Preferred Stock.

Pursuant to the terms of the Exchange Agreement, Mr. Deason may not transfer any shares of Xerox Series A Preferred Stock or convert any shares of Xerox Series A Preferred Stock into shares of Xerox common stock prior to the exchange for Xerox Series B Preferred Stock and for Conduent Series A Preferred Stock. Xerox or Mr. Deason may terminate the Exchange Agreement if Xerox publicly announces the abandonment of the Spin-Off.

 

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Conduent Series A Preferred Stock

As of October 27, 2016, there were no shares of Conduent Series A Preferred Stock outstanding. In connection with the Spin-Off, Conduent will issue to Xerox 120,000 shares of Conduent Series A Preferred Stock, having a liquidation preference of $1,000 per share. Pursuant to the terms of the Exchange Agreement, subject to the completion of the Spin-Off, among other conditions, Xerox will transfer 180,000 shares of Xerox Series B Preferred Stock and 120,000 shares of Conduent Series A Preferred Stock to Mr. Deason in exchange for all of Mr. Deason’s shares of Xerox Series A Preferred Stock. The Conduent Series A Preferred Stock will be issued in reliance on the exemption from registration contained in Section 4(a)(2) of the Securities Act.

See “Description of Our Capital Stock—Preferred Stock—Conduent Series A Preferred Stock” for a description of the terms of the Conduent Series A Preferred Stock.

Litigation Relating to the Spin-Off

On October 11, 2016, Mr. Deason filed a complaint against Xerox in the United States District Court for the Northern District of Texas, alleging that the Spin-Off, if consummated, would violate certain provisions of Xerox’s Certificate of Incorporation. Mr. Deason sought, among other things, an injunction preventing Xerox from consummating the Spin-Off. On October 14, 2016, Xerox filed a motion to dismiss or, in the alternative, transfer the litigation to the United States District Court for the Southern District of New York, pursuant to the forum selection provision contained in Xerox’s By-Laws. On October 27, 2016, Xerox, Conduent and Mr. Deason entered into a settlement agreement (the “Settlement Agreement”), which provides, among other things, for the voluntary dismissal of the litigation. In accordance with the terms of the Settlement Agreement, Mr. Deason filed a stipulation dismissing the litigation on October 27, 2016.

Reasons for Furnishing this Information Statement

We are furnishing this Information Statement solely to provide information to Xerox’s shareholders who will receive shares of our common stock in the Distribution. You should not construe this Information Statement as an inducement or encouragement to buy, hold or sell any of our securities or any securities of Xerox. We believe that the information contained in this Information Statement is accurate as of the date set forth on the cover. Changes to the information contained in this Information Statement may occur after that date, and neither we nor Xerox undertakes any obligation to update the information except in the normal course of our and Xerox’s public disclosure obligations and practices.

 

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DIVIDEND POLICY

We intend to retain future earnings for use in the operation of our business and to fund future growth. We do not anticipate paying any dividends on our common stock for the foreseeable future. Our Board will make all decisions regarding the payment of future dividends, and such decisions will depend on many factors, including our financial condition, earnings, capital requirements of our business, covenants associated with debt obligations, legal requirements, regulatory constraints, industry practice and other factors that our Board deems relevant. There can be no assurance that we will pay a dividend in the future or continue to pay any dividend if we do commence paying dividends. See also “Risk Factors—Risks Relating to Our Common Stock and the Securities Market—We do not anticipate paying any dividends on our common stock for the foreseeable future, and as a result, your only opportunity to achieve a return on your investment is if the price of our common stock appreciates.”

 

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CAPITALIZATION

The following table sets forth our cash and capitalization as of June 30, 2016, on a historical basis and on an as adjusted basis to give effect to the Spin-Off and the transactions related to the Spin-Off, as if they occurred on June 30, 2016. You should review the following table in conjunction with “Unaudited Pro Forma Combined Financial Statements”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our historical Combined and Condensed Combined Financial Statements and the accompanying notes thereto included elsewhere in this Information Statement.

 

     As of June 30, 2016  
     (unaudited)  
     Historical      As adjusted  
(in millions)       

Cash and cash equivalents

   $ 160       $ 410   
  

 

 

    

 

 

 

Capitalization

     

Debt:

     

Related party notes payable(1)

   $ 1,105         —     
  

 

 

    

 

 

 

Short-term debt and current portion of long-term debt

   $ 22       $ 22   

Long-term debt

     29         2,184   
  

 

 

    

 

 

 

Total third party debt(2)

   $ 51       $ 2,206   
  

 

 

    

 

 

 

Series A Convertible Preferred Stock(3)

   $ —         $ 140   
  

 

 

    

 

 

 

Equity:

     

Net parent investment

   $ 5,700       $ —     

Common stock, par value $0.01

     —           2   

Additional paid-in capital

     —           4,539   

Accumulated other comprehensive loss

     (194      (194
  

 

 

    

 

 

 

Total equity

   $ 5,506       $ 4,347   
  

 

 

    

 

 

 

Total capitalization

   $ 6,662       $ 6,693   
  

 

 

    

 

 

 

 

(1) Represents the amount of Related party notes payable, which are expected to be settled in advance of the Spin-Off.

 

(2) As adjusted Total third party debt includes approximately $2,200 million of new borrowings less approximately $45 million of debt issuance costs, which will be capitalized as a reduction of long-term debt and amortized over the initial weighted-average term of the borrowings.

 

(3) Reflects issuance of 120,000 shares of Conduent Series A Preferred Stock in connection with the Spin-Off with an aggregate liquidation preference of $120 million and a carrying value of approximately $140 million. The carrying value of $140 million is based on the proportional share of the carrying value of Xerox Series A Preferred Stock (300,000 shares at $349 million as of June 30, 2016) being exchanged for Conduent Series A Preferred Stock.

 

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SELECTED HISTORICAL FINANCIAL DATA

The following tables present selected historical financial data as of and for each of the years in the five-year period ended December 31, 2015 and as of June 30, 2016 and for the six months ended June 30, 2016 and 2015. The selected historical financial data as of December 31, 2015 and 2014 and for each of the fiscal years in the three-year period ended December 31, 2015 are derived from our audited Combined Financial Statements included elsewhere in this Information Statement. The selected historical financial data as of June 30, 2016 and for the six months ended June 30, 2016 and 2015 are derived from our unaudited Condensed Combined Financial Statements that are included elsewhere in this Information Statement. The selected historical financial data as of December 31, 2013 and as of and for the years ended December 31, 2012 and 2011 are derived from our unaudited financial statements that are not included in this Information Statement. The unaudited financial statements have been prepared on the same basis as the audited financial statements and, in the opinion of our management, include all adjustments, consisting of only ordinary recurring adjustments, necessary for a fair presentation of the data set forth in this Information Statement.

The selected historical financial data presented below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our Combined and Condensed Combined Financial Statements and the accompanying notes thereto included elsewhere in this Information Statement. The financial data included herein may not be indicative of the BPO Business’s future performance, do not necessarily include the actual expenses that would have been incurred by the BPO Business and may not reflect the results of operations, financial position and cash flows of the BPO Business had Conduent been a separate, standalone company during the periods presented.

 

     Year Ended December 31,      Six Months Ended June
30,
 
     2015     2014     2013      2012      2011      2016     2015  
            (unaudited)      (unaudited)      (unaudited)     (unaudited)  
($ in millions, except per share data)                                  

Selected Combined and Condensed Combined Statements of (Loss) Income Data:

                 

Total Revenues

   $ 6,662      $ 6,938      $ 6,879       $ 6,873       $ 6,274       $ 3,298      $ 3,361   

(Loss) Income from Continuing Operations

     (336     34        135         137         134         (33     (109

Net (Loss) Income

     (414     (81     182         170         189         (33     (170

Unaudited Pro Forma Earnings per Share—Continuing Operations:

                 

Basic Loss per Share

   $ (1.83     *        *         *         *       $ (0.22     *   

Diluted Loss per Share

   $ (1.83     *        *         *         *       $ (0.22     *   

 

     As of December 31,      As of June 30, 2016  
     2015      2014      2013      2012      2011     
                   (unaudited)      (unaudited)      (unaudited)      (unaudited)  
($ in millions)                            

Selected Combined and Condensed Combined Balance Sheets Data:

                 

Total Assets

   $ 9,058       $ 10,954       $ 11,205       $ 11,217       $ 10,764       $ 9,017   

Long-term debt

     37         43         310         292         293         29   

 

* Not available

 

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UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS

The unaudited pro forma Combined Financial Statements of Xerox’s business process outsourcing business and related operations (the “BPO Business”, “we,” “us” or “our”) consist of unaudited pro forma Combined Statements of Loss for the six months ended June 30, 2016 and the year ended December 31, 2015, and an unaudited pro forma Combined Balance Sheet as of June 30, 2016, which have been derived from our historical Combined and Condensed Combined Financial Statements included elsewhere in this Information Statement. See “Index to Financial Statements”. To effect the separation, Xerox will first undertake a series of Internal Transactions, following which Conduent Incorporated will hold, directly or through its subsidiaries, the BPO Business. The separation will be completed by way of a pro rata distribution of Conduent Incorporated shares held by Xerox to Xerox’s shareholders.

The unaudited pro forma Combined Financial Statements reflect adjustments to our historical financial results in connection with the Spin-Off and Distribution. The unaudited pro forma Combined Statements of Loss give effect to the Spin-Off and Distribution as if they had occurred on January 1, 2015, the beginning of our most recently completed fiscal year. The unaudited pro forma Combined Balance Sheet gives effect to these events as if they occurred as of June 30, 2016, our latest balance sheet date.

Our unaudited pro forma Combined Financial Statements have been prepared to reflect adjustments to our historical Combined and Condensed Combined Financial Statements that are: (i) factually supportable, (ii) directly attributable to the Spin-Off and Distribution and (iii) with respect to unaudited pro forma Combined Statements of Loss, expected to have a continuing impact on the BPO Business following the completion of the Spin-Off and Distribution. However, such adjustments are subject to change based on the finalization of the terms of the Spin-Off and related transaction agreements. The unaudited pro forma Combined Financial Statements have been adjusted to give effect to the following (collectively, the “Pro Forma Transactions”):

 

    The incurrence of debt as part of the plan to capitalize Conduent with total cash of approximately $410 million and total principal debt of approximately $2,250 million and the transfer of approximately $1,905 million of the net proceeds of such debt to Xerox;

 

    The exchange of all of the outstanding shares of Xerox Series A Preferred Stock for shares of Xerox Series B Preferred Stock and shares of Conduent Series A Preferred Stock;

 

    The settlement of related party account balances between us and Xerox;

 

    The transfer of certain corporate and other assets and liabilities between us and Xerox;

 

    The removal of non-recurring separation costs, which were incurred during the six months ended June 30, 2016; and

 

    The tax-free distribution, for U.S. federal income tax purposes, of shares of our common stock to Xerox stockholders, based on the distribution of one share of our common stock for every five Xerox common shares outstanding as of the record date for the distribution, and the resulting redesignation of Xerox’s historical net investment as common stock and additional paid-in capital.

Our historical Combined and Condensed Combined Financial Statements included elsewhere in this Information Statement include an allocation of general corporate expenses from Xerox. These expenses include costs for corporate functions including senior management, legal, human resources, finance and accounting, treasury, information technology, marketing and communication, internal audit and other shared services. The financial information in our historical Combined and Condensed Combined Financial Statements included elsewhere in this Information Statement does not necessarily include all the expenses that would have been incurred by the BPO Business had it been a separate, standalone company. To operate as an independent, publicly traded company, we expect to incur costs to replace certain services previously provided by Xerox, which costs may be higher than those reflected in our historical Combined and Condensed Combined Financial Statements included elsewhere in this Information Statement, in addition to increased administrative and other costs. Due to the scope and complexity of these activities, the amount and timing of these incremental costs could vary. Due to the regulations governing the preparation of pro forma financial statements, the unaudited pro forma

 

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Combined Financial Statements do not reflect these incremental costs associated with being an independent, publicly traded company because they are projected amounts based on subjective estimates and are not factually supportable. The unaudited pro forma Combined Financial Statements do not reflect the expected charges or the expected realization of any cost savings or other synergies.

The unaudited pro forma Combined Financial Statements should be read together with our historical Combined and Condensed Combined Financial Statements and the notes thereto, “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Information Statement. For more detail on the exchange of all of the outstanding shares of Xerox Series A Preferred Stock for shares of Xerox Series B Preferred Stock and shares of Conduent Series A Preferred Stock, see “The Spin-Off—Treatment of Xerox Preferred Stock in the Spin-Off.” The unaudited pro forma Combined Financial Statements are provided for illustrative and informational purposes only and are not intended to represent what our results of operations or financial position would have been had the Spin-Off and Distribution been completed on the dates assumed. The unaudited pro forma Combined Financial Statements also may not be indicative of our future results of operations or financial position as a standalone public company.

 

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BPO BUSINESS OF XEROX CORPORATION

UNAUDITED PRO FORMA COMBINED STATEMENT OF LOSS

SIX MONTHS ENDED JUNE 30, 2016

 

(in millions, except per share data)

   Historical     Pro forma
Adjustments
    Notes      Pro Forma  

Revenues

         

Outsourcing

   $ 3,271      $ —           $ 3,271   

Related party

     27        —             27   
  

 

 

   

 

 

      

 

 

 

Total Revenues

     3,298        —             3,298   
  

 

 

   

 

 

      

 

 

 

Costs and Expenses

         

Cost of outsourcing

     2,760        —             2,760   

Related party cost of services

     19        —             19   

Research and development

     18        —             18   

Selling, administrative and general

     353        —             353   

Restructuring and related costs

     49        —             49   

Amortization of intangible assets

     137        —             137   

Separation costs

     19        (19     (e)         —     

Related party interest

     20        (20     (c)         —     

Interest expense

     2        69        (a)         71   

Other expenses, net

     9        —             9   
  

 

 

   

 

 

      

 

 

 

Total Costs and Expenses

     3,386        30           3,416   
  

 

 

   

 

 

      

 

 

 

Loss before Income Taxes

     (88 )      (30 )         (118 ) 

Income tax benefit

     (55     (23     (f)         (78
  

 

 

   

 

 

      

 

 

 

Loss from Continuing Operations

   $ (33 )    $ (7 )       $ (40 ) 

Preferred dividends

     —          (5     (i)         (5
  

 

 

   

 

 

      

 

 

 

Loss Attributable to Common Shareholders

   $ (33   $ (12      $ (45
  

 

 

   

 

 

      

 

 

 

Pro Forma Earnings per Share:

         

Basic Loss per Share:

         

Continuing operations

         (i)       $ (0.22
         

 

 

 

Diluted Loss per Share:

         

Continuing operations

         (j)       $ (0.22
         

 

 

 

Pro Forma shares outstanding (thousands):

         

Basic

         (i)         202,633   
         

 

 

 

Diluted

         (j)         202,633   
         

 

 

 

The accompanying notes are an integral part of these Unaudited Pro Forma Combined Financial Statements.

 

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BPO BUSINESS OF XEROX CORPORATION

UNAUDITED PRO FORMA COMBINED STATEMENT OF LOSS

YEAR ENDED DECEMBER 31, 2015

 

(in millions, except per share data)

   Historical     Pro forma
Adjustments
    Notes      Pro Forma  

Revenues

         

Outsourcing

   $ 6,609      $ —           $ 6,609   

Related party

     53        —             53   
  

 

 

   

 

 

      

 

 

 

Total Revenues

     6,662        —             6,662   
  

 

 

   

 

 

      

 

 

 

Costs and Expenses

         

Cost of outsourcing

     5,937        —             5,937   

Related party cost of services

     40        —             40   

Research and development

     52        —             52   

Selling, administrative and general

     699        —             699   

Restructuring and asset impairment charges

     159        —             159   

Amortization of intangible assets

     250        —             250   

Related party interest

     61        (61     (c)         —     

Interest expense

     8        137        (a)         145   

Other expenses, net

     30        —             30   
  

 

 

   

 

 

      

 

 

 

Total Costs and Expenses

     7,236        76           7,312   
  

 

 

   

 

 

      

 

 

 

Loss before Income Taxes

     (574 )      (76 )         (650 ) 

Income tax benefit

     (238     (32     (f)         (270
  

 

 

   

 

 

      

 

 

 

Loss from Continuing Operations

   $ (336 )    $ (44 )       $ (380 ) 

Preferred dividends

     —          (10     (i)         (10
  

 

 

   

 

 

      

 

 

 

Loss Attributable to Common Shareholders

   $ (336 )    $ (54 )       $ (390 ) 
  

 

 

   

 

 

      

 

 

 

Pro Forma Earnings per Share:

         

Basic Loss per Share:

         

Continuing operations

         (i)       $ (1.83
         

 

 

 

Diluted Loss per Share:

         

Continuing operations

         (j)       $ (1.83
         

 

 

 

Pro Forma shares outstanding (thousands):

         

Basic

         (i)         212,905   
         

 

 

 

Diluted

         (j)         212,905   
         

 

 

 

The accompanying notes are an integral part of these Unaudited Pro Forma Combined Financial Statements.

 

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BPO BUSINESS OF XEROX CORPORATION

UNAUDITED PRO FORMA COMBINED BALANCE SHEET

AS OF JUNE 30, 2016

 

(in millions)

  Historical     Pro forma
Adjustments
    Notes     Pro Forma  

Assets

       

Cash and cash equivalents

  $ 160      $ 250        (a )    $ 410   

Accounts receivable, net

    1,382        —            1,382   

Related party notes receivable

    248        (248 )      (c )      —     

Other current assets

    270        —            270   
 

 

 

   

 

 

     

 

 

 

Total current assets

    2,060        2          2,062   

Land, buildings and equipment, net

    268        (3 )      (d )      265   

Intangible assets, net

    1,288        —            1,288   

Goodwill

    4,857        —            4,857   

Other long-term assets

    544        1        (d )      545   
 

 

 

   

 

 

     

 

 

 

Total Assets

  $ 9,017      $ —          $ 9,017   
 

 

 

   

 

 

     

 

 

 

Liabilities and Net Parent Equity

       

Short-term debt and current portion of long-term debt

  $ 22      $ —          $ 22   

Related party notes payable

    1,105        (1,105 )      (c )      —     

Accounts payable

    105        —            105   

Accrued compensation and benefits costs

    267        (6 )      (d )      261   

Unearned income

    212        —            212   

Other current liabilities

    685        (11 )      (d )(g)      674   
 

 

 

   

 

 

     

 

 

 

Total current liabilities

    2,396        (1,122 )        1,274   

Long-term debt

    29        2,155        (a )      2,184   

Pension and other benefit liabilities

    151        —            151   

Deferred taxes

    787        (14 )      (f )(g)      773   

Other long-term liabilities

    148        —            148   
 

 

 

   

 

 

     

 

 

 

Total Liabilities

    3,511        1,019          4,530   
 

 

 

   

 

 

     

 

 

 

Series A Convertible Preferred Stock

    —          140        (b     140   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net Parent Equity:

       

Common Stock ($0.01 par value)

    —          2        (h )      2   

Additional paid in capital

    —          4,539        (h )      4,539   

Net parent investment

    5,700        (5,700 )      (a )(b)(c)(d)(f)(g)(h)      —     

Accumulated other comprehensive loss

    (194         (194
 

 

 

   

 

 

     

 

 

 

Total Net Parent Equity

    5,506        (1,159       4,347   
 

 

 

   

 

 

     

 

 

 

Total Liabilities and Net Parent Equity

  $ 9,017      $ —          $ 9,017   
 

 

 

   

 

 

     

 

 

 

The accompanying notes are an integral part of these Unaudited Pro Forma Combined Financial Statements.

 

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BPO BUSINESS OF XEROX CORPORATION

NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS

The unaudited pro forma Combined Financial Statements as of and for the six months ended June 30, 2016 and the unaudited pro forma Combined Statement of Loss for the year ended December 31, 2015 include the following adjustments:

 

(a) In connection with our separation capitalization plan, we expect to incur additional borrowings in order to redistribute debt between us and Xerox, such that we will have total principal debt of approximately $2,250 million immediately following the separation ($2,200 million of new borrowings plus approximately $50 million of existing debt). We currently expect to effect this separation capitalization plan through a combination of some or all of the following types of borrowings:

 

    Secured Term Loans under one or more new term loan facilities; and

 

    Senior Unsecured Notes

In addition, we expect to enter into a new secured revolving credit facility, which is not expected to be drawn at the Distribution Date. For purposes of these unaudited pro forma combined financial statements, we have assumed that the additional borrowings will be Long-term debt. We have made an adjustment of $250 million to cash and cash equivalents to reflect the $410 million of cash that we expect to have immediately following the separation. Debt issuance costs are expected to be approximately $45 million, which will be capitalized as a reduction of Long-term debt and amortized over the initial weighted-average term of the borrowings. The actual mix of our debt, the amount of debt issuance costs incurred and the amount of cash held by us at the Distribution Date will depend on a number of factors, including market conditions at the time we incur such debt and the total Xerox cash balance at the Distribution Date.

With respect to the additional debt we expect to incur in connection with the separation, we have assumed an initial weighted average annual interest rate of approximately 5.75% and weighted average term of approximately 6 years. The assumed weighted average annual interest rate was derived from information received from prospective lenders, which is based on current market conditions, the historical London Interbank Offered Rate (“LIBOR”) rate, and our anticipated credit ratings. The actual interest rate and term of any such indebtedness may vary from these assumptions and will depend upon the final debt structure that we execute prior to the Spin-Off and Distribution as well as market conditions at that time.

The adjustment to our historical interest expense for the six months ended June 30, 2016 and the year ended December 31, 2015 to give effect to the incurrence of the debt described above is presented below (in millions):

 

     Six Months
ended June 30,
2016
     Year ended
December 31,
2015
 

Interest on additional debt

   $ 65       $ 129   

Amortization of debt issuance cost

   $ 4       $ 8   
  

 

 

    

 

 

 

Total

   $ 69       $ 137   
  

 

 

    

 

 

 

Interest on additional debt excludes interest associated with borrowings under the anticipated secured revolving credit facility, which is not expected to be drawn at the Distribution Date. However, this credit facility is expected to be utilized from time to time following the Distribution Date and could have an outstanding balance of up to an estimated amount of approximately $750 million at an estimated weighted average annual interest rate of approximately 4.0%.

 

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Each 0.125% change in the estimated weighted average annual interest rate would cause pro forma interest expense to change by approximately $3 million on an annual basis (not including any additional interest expense attributable to borrowing under the secured revolving credit facility described above).

In accordance with the SEC’s rules governing pro forma adjustments, no pro forma adjustment for imputed interest income on incremental cash balances has been recorded.

For purposes of these unaudited pro forma Combined Financial Statements, the adjustment to Net parent investment represents the distribution to Xerox of all of the proceeds from the new borrowings net of debt issuance costs and the portion of such proceeds retained by us for general corporate purposes. The pro forma adjustment related to our separation capitalization plan is reflected in the unaudited pro forma Combined Balance Sheet as of June 30, 2016 as follows (in millions):

 

Cash and cash equivalents

   $ 250   

Long-term debt*

   $ 2,155   

Net parent investment**

   $ (1,905

 

  * Estimated debt issuance costs of $45 million are included as a reduction of long-term debt.
  ** Reflects the transfer to Xerox of $1,905 million of cash.

 

(b) In connection with the separation capitalization plan discussed in adjustment (a) above, all of the outstanding shares of Xerox Series A Preferred Stock are expected to be exchanged for shares of Xerox Series B Preferred Stock and shares of Conduent Series A Preferred Stock. See “Description of Our Capital Stock—Preferred Stock—Conduent Series A Preferred Stock” for a description of the terms of the Conduent Series A Preferred Stock.

In connection with the Spin-Off, we expect to issue 120,000 shares of Conduent Series A Preferred Stock that will be exchanged for Xerox Series A Preferred Stock in this exchange, having an aggregate liquidation preference of $120 million ($1,000 per share) and a carrying value of approximately $140 million. The carrying value of $140 million is based on the proportional share of the carrying value of Xerox Series A Preferred Stock (300,000 shares at $349 million as of June 30, 2016) being exchanged for Conduent Series A Preferred Stock. The Conduent Series A Preferred Stock is expected to pay quarterly cash dividends at a rate of 8% per year (for a total of approximately $10 million per year) and these unaudited pro forma Combined Financial Statements assume all such quarterly dividends were declared and paid in the period presented. Each share of Conduent Series A Preferred Stock is expected to be convertible at any time, at the option of the holder, into 44.9438 shares of our common stock for a total of 5,393 thousand shares (reflecting a conversion price of approximately $22.25 per share of our common stock and after assuming a distribution ratio of one share of our common stock for every five Xerox common shares, as discussed in adjustment (h) below).

The Conduent Series A Preferred Stock issued by us is classified as temporary equity (i.e., apart from permanent equity) as a result of certain contingent redemption features.

The pro forma adjustment related to the exchange of all of the outstanding shares of Xerox Series A Preferred Stock for shares of Xerox Series B Preferred Stock and shares of Conduent Series A Preferred Stock is reflected in the unaudited pro forma Combined Balance Sheet as of June 30, 2016 as follows (in millions):

Series A Convertible Preferred Stock

      $ 140   

Net parent investment

      $ (140

 

(c) In connection with the separation, Xerox will settle all Related party notes – receivable and payable. The pro forma adjustment related to the settlement of Related Party Notes is reflected in the unaudited pro forma Combined Balance Sheet as of June 30, 2016 as follows (in millions):

 

Related party notes receivable

   $ (248

Related party notes payable

   $ (1,105

Net parent investment

   $ 857   

 

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The adjustment to our historical Related party interest expense for the six months ended June 30, 2016 and the year ended December 31, 2015 to give effect to the settlement of Related Party Notes is presented below (in millions):

 

     Six Months
ended June 30,
2016
     Year ended
December 31,
2015
 

Related party interest

   $ (20    $ (61

 

(d) In connection with the separation, Xerox will transfer certain corporate and other assets and liabilities, to us prior to the Distribution Date. The transfers will include a portion of Xerox’s global real estate portfolio and information technology department, and associated assets and certain liabilities, as well as assets and liabilities related to certain Xerox Research Centers, which will be transferred to us. In addition, we will transfer certain assets and liabilities to Xerox mainly related to our global shared service centers. The expenses, including depreciation, related to these assets and liabilities to be transferred are not material to the unaudited pro forma Combined Financial Statements; accordingly, no incremental expenses are included in the unaudited pro forma Combined Financial Statements.

The pro forma adjustment related to the transfer of these corporate and other assets and liabilities is reflected in the unaudited pro forma Combined Balance Sheet as of June 30, 2016 as follows (in millions):

 

Land, buildings and equipment, net

   $ (3

Other long-term assets

   $ 1   

Accrued compensation and benefits costs

   $ (6

Other current liabilities

   $ 1   

Net parent investment

   $ 3   

There may be additional assets and liabilities that may be transferred between Xerox and us in connection with the separation for which the allocation and transfer procedures have not been finalized.

 

(e) This adjustment removes non-recurring separation costs of $19 million incurred during the six months ended June 30, 2016 that are directly related to the separation and the associated deferred tax benefit/asset of $7 million. These costs are included in our historical results of operations for the six months ended June 30, 2016 but are not expected to have a continuing impact on our results of operations following the completion of the separation. In addition, this adjustment also removes tax expense of $10 million for the estimated income tax on the book/tax basis differences currently associated with our investments in certain subsidiaries that are expected to be impacted by the Internal Transactions previously noted.

 

(f) The pro forma income tax adjustments were determined using the statutory tax rate in effect in the respective tax jurisdictions during the periods presented.

The adjustment to our historical income tax expense (benefit) for the six months ended June 30, 2016 and the year ended December 31, 2015 to give effect to the pro forma adjustments is presented below (in millions):

 

     Six Months
ended June 30,
2016
     Year ended
December 31,
2015
 

Interest (adjustment (a))

   $ (27    $ (53

Related party interest (adjustment (c))

   $ 7       $ 21   

Separation costs (adjustment (e))

   $ (3    $ –     
  

 

 

    

 

 

 

Total

   $ (23    $ (32
  

 

 

    

 

 

 

The pro forma adjustment related to income taxes is reflected in the unaudited pro forma Combined Balance Sheet as of June 30, 2016 as follows (in millions):

 

Deferred taxes

   $ 3   

Net parent investment

   $ (3

 

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(g) This pro forma adjustment includes adjustments for net operating losses, tax credit carryforwards and valuation allowances that had been recorded in the deferred tax accounts. These deferred tax assets for net operating loss and tax credit carryforwards were included in the historical Condensed Combined Balance Sheet as of June 30, 2016 as part of the separate tax return basis calculation of income taxes. These carryforwards were either utilized against Xerox’s income and are not available as future deductions on tax returns or will be retained by Xerox upon separation and as such have been removed from the balance sheet along with the valuation allowance as a pro forma adjustment. In addition, the pro-forma adjustment includes the transfer of credit carryforwards that were previously settled with Xerox but will be retained by the BPO Business upon separation. The actual amounts being assumed and transferred will be determined as of the Distribution Date and may be different from our estimate.

The pro forma adjustment related to the above is reflected in the unaudited pro forma Combined Balance Sheet as of June 30, 2016 as follows (in millions):

 

Other current liabilities

   $ (12

Deferred taxes

   $ (17

Net parent investment

   $ 29   

 

(h) Reflects the pro forma recapitalization of our equity. As of the Distribution Date, Xerox’s investment in our business will be redesignated as our stockholders’ equity and will be allocated between common stock and additional paid-in capital based on the number of shares of our common stock outstanding at the Distribution Date. Xerox stockholders will receive shares assuming a distribution ratio of one share of our common stock for every five Xerox common shares outstanding as of the record date for the distribution (1,013 million Xerox shares outstanding at June 30, 2016).

The pro forma adjustment related to recapitalization of our equity is reflected in the unaudited pro forma Combined Balance Sheet as of June 30, 2016 as follows (in millions):

 

Common stock ($0.01 par value)

   $ 2   

Additional paid-in capital

   $ 4,539   

Net parent investment*

   $ (4,541

 

  * Represents the Net parent investment remaining after previous adjustments to this line — i.e. adjustments (a), (b), (c), (d), (f) and (g).

 

(i) The Loss Attributable to Common Shareholders reflects preferred dividends on the shares of Conduent Series A Preferred Stock discussed in adjustment (b) above. The weighted-average number of shares of our common stock used to compute basic earnings per share for the six months ended June 30, 2016 and the year ended December 31, 2015 is based on the number of weighted average Xerox common shares outstanding during the six months ended June 30, 2016 and year ended December 31, 2015, respectively, assuming a distribution ratio of one share of our common stock for every five Xerox common shares outstanding.

 

(j) The weighted average number of shares used to compute diluted earnings per share is based on the weighted average number of basic shares of our common stock as described in Note (h) above. Since the BPO Business had a net loss for the six months ended June 30, 2016 and the year ended December 31, 2015, incremental shares associated with the stock-based awards granted to our employees under Xerox’s stock-based compensation plans — restricted stock units, performance shares and stock options — were not included in the computation of earnings per share in either period since if included they would have been anti-dilutive. In addition, due to loss in both periods, shares of common stock of Conduent associated with the shares of Conduent Series A Preferred Stock were not included in the calculation and therefore the related dividend was included for the computation of diluted earnings per share.

The actual future impact of potential dilution from stock-based awards granted to our employees under Xerox equity plans will depend on various factors, including employees who may change employment from one company to another. However, we do not currently believe that the future dilutive impact will be material.

 

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BUSINESS

Our Company

Conduent is a leading provider of business process services with expertise in transaction-intensive processing, analytics and automation. We serve as a trusted business partner in both the front office and back office, enabling personalized, seamless interactions on a massive scale that improve end-user experiences.

We create value for our commercial and government clients by applying our expertise, technology and innovation to help them drive customer and constituent satisfaction and loyalty, increase process efficiency and respond rapidly to changing market dynamics.

Our portfolio includes industry-focused service offerings in attractive growth markets such as healthcare and transportation, as well as multi-industry service offerings such as transaction processing, customer care and payment services.

We believe our addressable market size in the global business process service industry is estimated at nearly $260 billion in 2016, with expected growth rates in the mid-single digits through 2019. We have leadership positions in key market segments, including healthcare and transportation, which are expected to grow at 8% and 5% on a compounded annual basis through 2019, respectively. In addition, we are well positioned to capitalize on key industry trends such as increased demand for productivity, automation, personalization and innovation to capture growth.

Our strategy is to drive portfolio focus, operational discipline, sales and delivery excellence and innovation, complemented by tightly aligned investments. As a result, we aim to generate sustainable value for our shareholders by delivering profitable growth and margin expansion and deploying a disciplined capital allocation strategy.

With approximately 93,700 employees globally, we provide differentiated services to clients spanning small, medium and large businesses and to governments of all sizes in 42 countries. In 2015, we generated $6,662 million in total revenues, 90% of which was recurring.

Our Transformation

We have a track-record of active portfolio management with an ongoing focus on optimizing our capabilities and effectively targeting attractive growth areas in a rapidly evolving business process services industry. In recent years, we have taken significant actions to improve our profitability and drive growth with a more focused portfolio of services. These include the divestiture of our Information Technology Outsourcing (“ITO”) business, the refocusing of our Government Healthcare business, the re-organization of our delivery operations, as well as acquisitions and organic investments in key growth markets to expand our capabilities and client reach. We plan to continue enhancing our operational and portfolio focus as a standalone company.

Recently completed initiatives include:

 

    Consolidated Delivery Operations. In late 2014, we re-organized and consolidated our delivery operations based on our services capabilities to enable greater productivity and improved global delivery consistency.

 

    Divested Non-Core Assets: We completed the sale of our ITO business on June 30, 2015 to Atos SE. The sale enabled us to increase our focus on areas where we have a competitive advantage.

 

    Refocused our Government Healthcare Business. In 2015, we refocused our Government Healthcare business on higher margin, growing segments such as medical and pharmacy benefits management and fraud and abuse detection. We also reduced our participation in certain Medicaid platform implementations that were presenting unattractive levels of risk and exposure.

 

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    Increased Use of Automation. We have developed and deployed a set of advanced software-based automation tools as part of our service delivery operations. These tools reduce the amount of repetitive, manual labor required to deliver many of our services and improve service quality through lower error rates and faster processing times.

We are also in the process of a strategic transformation program to deliver cost savings through infrastructure optimization, labor productivity and automation initiatives, restructuring of unprofitable contracts and other efficiencies. As an independent company, we will be able to better capitalize on our differentiated service offerings, industry expertise and global delivery excellence to position us for long-term shareholder value creation.

Our Industry

We believe our addressable market size in the global business process service industry is estimated at nearly $260 billion in 2016 and we are a leader across several segments of this large, diverse and growing market. Providing business process services today is complex and multi-faceted with services that span many industries.

Ongoing competitive pressures and increasing demand for further productivity gains have motivated businesses to outsource elements of their day-to-day operations to accelerate performance and innovation. As a result, our clients have become more focused on their core businesses and the range of outsourced activities has expanded greatly. Increasing globalization has also required many companies to optimize cost structures to retain competitiveness and increase shareholder value. Business process services have become a key component of this strategy.

The ongoing shift to new generation software and automation technologies is driving greater demand for, and expectation of, efficiency and personalization by the constituents and customers of the businesses and governments we serve. Addressing these business and operational challenges is necessary for business process services companies to capitalize on these trends. In addition, business process services have the potential to meaningfully enhance productivity for businesses and governments and satisfaction for their constituents and customers.

Our Segments

Our reportable segments correspond to how we organize and manage the business and are aligned to the industries in which our clients operate: Healthcare, Public Sector and Commercial Industries.

 

    Our Healthcare segment provides industry-centric business process services to clients across the healthcare industry, including providers, payers, employers, pharmaceutical and life science companies and government agencies.

 

    Our Public Sector segment provides government-centric business process services to U.S. federal, state and local and foreign governments.

 

    Our Commercial Industries segment provides business process services and customized solutions to clients in a variety of industries (other than healthcare).

Our Government Health Enterprise (“HE”) Medicaid Platform and Student Loan businesses, as well as non-allocated expenses and inter-segment eliminations, are included in Other.

We present segment financial information in Note 2 to our historical Combined Financial Statements included elsewhere in this Information Statement. The figure below illustrates the breakdown of our segment revenues for the year ended December 31, 2015.

 

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LOGO

 

Healthcare Segment

Our Healthcare segment generated revenues of $1,750 million in 2015, representing 26% of our total 2015 revenues. Through this segment we offer innovative services and subject matter expertise to clients across the healthcare industry, including providers, payers, employers, pharmaceutical and life science companies and government agencies. We strive to enable our healthcare clients to focus on improving the patient care experience, lowering total costs and enabling better long-term health outcomes. Our Healthcare segment primarily serves the following types of clients:

 

    Healthcare Payer. We deliver administrative efficiency services and customer experience services to 19 of the top 20 commercial payers. Our services include payment integrity solutions, the full spectrum of provider support services, member engagement services, health risk assessment, claims processing, mailroom services and outbound printing. Our broad set of services help healthcare payers to optimize costs by streamlining business processes and recovering incorrectly attributed liabilities. In addition, our services assist with member risk assessment and improve member experience through enhanced engagement tools.

 

    Healthcare Provider Solutions. We provide care and quality analytics and software adoption services to hospitals, doctors and other healthcare providers, including large healthcare systems, with contracts in 49 of the 50 states. Our healthcare provider services include a care and quality platform (Midas+), system integration and advisory services to support electronic health record system implementations, software adoption services and community health population analytics. Our services help our clients obtain enhanced access to patient data to improve quality of care, achieve better regulatory compliance by meeting accurate and timely reporting needs and improve their return on technology investments through simulation-based software adoption.

 

    Government Healthcare. We provide administrative and care management services to Medicaid programs and federally-funded U.S. government healthcare programs in 29 states, Puerto Rico and the District of Columbia. Our services include a range of innovative solutions such as Medicaid management fiscal agent, pharmacy benefits management and clinical program management. These services help states optimize their costs by streamlining access to care and improve patient health outcomes through population health management and help families in need by improving enrollment and claims processing.

 

    Pharmaceuticals & Life Sciences. We provide services to 9 of the top 10 global pharmaceutical and life science companies to support their revenue generation and clinical services. Our services include inside sales for drug detailing, clinical trial recruitment, patient access and medication adherence and compliance solutions. These services help generate incremental revenue by driving increased adoption of both mature and new drugs by clinicians and improve patient health outcomes by facilitating access to drugs and driving medication adherence.

 

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Public Sector Segment

Our Public Sector segment generated revenues of $1,727 million in 2015, representing 26% of our total 2015 revenues. This segment provides government-centric business process services to U.S. federal, state and local and foreign governments for transportation, public assistance program administration, transaction processing and payment services. In order to provide targeted support to our government clients, our Public Sector segment is organized into two primary businesses:

 

    Transportation. We provide revenue-generating transportation services to government clients in over 25 countries. Our services include support for electronic toll collection, public transit, parking, photo enforcement and commercial vehicle operations. These innovative services significantly improve individual travel experiences, optimize how vehicles and goods move efficiently within cities, digitize integrated modes of transportation and help our government clients to better serve their constituents.

 

    Federal, State and Local Government. We support our government clients with services targeting key civilian agencies within federal, state and local governments, as well as government administrative offices. Our depth of agency-specific expertise combined with our scale allows us to deliver and manage programs at all levels of government. Our services include support for government benefit programs such as child support, electronic benefits, eligibility and payment cards and unclaimed property, among others.

Commercial Industries Segment

Our Commercial Industries segment is our largest segment, with $2,896 million in revenues in 2015, representing 44% of our total 2015 revenues. Across the Commercial Industries segment, we deliver end-to-end business-to-business and business-to-customer services that enable our clients to optimize their key processes. Our multi-industry competencies include customer care, human resource management and finance and accounting services. These services are complemented by innovative industry-specific services such as personalized product information for clients in the automotive industry, digitized source-to-pay solutions for clients in the manufacturing industry, customer experience and marketing services for clients in the retail industry, mortgage and consumer loan processing for clients in the financial services industry and customized workforce learning solutions for clients in the aerospace industry.

Other

Other includes our Government HE Medicaid Platform business, where we are limiting our focus to implementing and maintaining systems for our current clients, and our Student Loan business, which is in run-off, as well as non-allocated expenses and inter-segment eliminations. In 2015, Other accounted for $289 million of revenues, representing 4% of our total 2015 revenues.

Our Service Offerings

Our portfolio of business process services includes a combination of industry-specific services and multi-industry services. We have subject matter experts who are responsible for implementing each of these services, delivering service excellence to clients, ensuring best practices to improve cost competitiveness, innovating our next generation offerings and supporting worldwide sales.

 

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The figure below depicts the services we offer:

 

 

Industry-Specific Services

 

 

LOGO

Multi-Industry Services

 

 

LOGO

 

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Industry-Specific Services

Healthcare Industry-Specific Services

Our healthcare services include care integration and coordination, member health risk assessments, payment integrity (e.g., recovering claims from the appropriate payers), fiscal agent administrative services and providing management information systems in support of Medicaid programs, pharmacy benefits management, clinical trial recruitment and care and quality analytics.

Public Sector-Specific Services

Transportation Services. The transportation services we offer include support for electronic toll collection, public transit, parking, photo enforcement and commercial vehicle operations. Across these offerings, we manage key processes on behalf of our clients including fee collection, compliance and violation management, notifications, statements and reporting.

Other Public Sector Services. Our broad set of public sector services includes public assistance program administration, pension administration, records management, disease management and software offerings in support of federal, state and local government agencies.

Commercial Industry-Specific Services

Examples of the services we offer include personalized product information for automotive clients, digitized source to pay solutions for manufacturing clients, customer experience and marketing services for retail clients, mortgage and consumer loan processing for financial institution clients and customized workforce learning solutions for aerospace clients.

Multi-Industry Services

Transaction Processing Services

We help our clients to improve communications with their customers and constituents, whether it is on paper, on-line or through other communication channels. By supporting our clients’ customer communication processes, we help our clients deliver a better experience to their customers and operate with improved efficiency and greater effectiveness.

We offer a broad array of flexible transaction processing services that include data entry, scanning, image processing, enrollment processing, claims processing, high volume offsite print and mail services and file indexing. Our multi-channel communication capabilities (including secure print, email, text and web) enable the delivery of personalized and targeted communications that are designed to elicit the desired response from customers or other end-users (e.g., on-time bill payment, increased marketing response rates). Our service offerings utilize both proprietary and commercially available third-party technologies, combined with our expertise to ensure continued quality and innovation for our clients.

Payment Services

Prepaid Cards. We are an extensive provider of VISA and MasterCard prepaid debit cards, as well as other electronic payment cards. We are a leading provider of prepaid payment card services in support of U.S. government benefit programs including Social Security, Supplemental Nutrition Assistance Program (formerly known as food stamps), Special Supplemental Nutrition Program for Women, Infants and Children and other specialized Electronic Benefits Transfer programs. Our secure payment services reduce fraud and eliminate paper checks by disbursing electronic payments directly to end users, even those without bank accounts. Our proprietary processing platform, significant operational expertise, advanced fraud analytics and adoption of Europay, MasterCard and Visa chip-enabled technology put us in the forefront of the prepaid card industry.

 

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Health Savings Accounts. We provide clients with a simplified approach to help their employees manage their health care costs and accumulate wealth with tax-advantaged accounts. We consolidate administration of all health spending accounts onto one common platform, including Health Savings Accounts, Health Reimbursement Arrangements, Flexible Spending Accounts and Health Incentive Accounts. By consolidating and integrating the management of health spending accounts, we help our clients improve benefit enrollment and account opening, consolidate customer service, simplify communications and streamline account funding and management.

Child Support Payments. We are an industry leader of U.S. State Government Disbursement Units for child support payments. We collect payments from non-custodial parents via check, credit card and transfers from employee payroll systems and disburse payments to the beneficiaries.

Customer Care Services

We offer customer care services that help our clients provide their own customers with a superior experience. Our service offerings range from answering simple billing questions to providing complex technical and customer support. We also offer both inbound and outbound sales and cross-selling programs through our contact center operations. We provide these services through multiple channels, including phone, SMS, chat, interactive voice response, social networks and email. We augment our customer care agents’ efficiency and effectiveness with advanced technologies that help them resolve customer needs quickly and with consistently high quality.

Human Resources Services

We help our clients to support their employees at all stages of employment from initial onboarding through retirement. We offer clients customized advisory, technology and administrative services that help them more effectively involve employees in their health insurance, retirement plan and compensation programs. We design and administer employee benefit programs that attract, reward and retain workforce talent through engaging technologies and decision support tools. Our service offerings include global health and retirement plan consultation and administration; cloud-based HR outsourcing; payroll and benefits administration; health savings and tax efficient account administration; and administration of, and consultation regarding, our proprietary private health care exchange, which allows employees to select from a set of pre-defined providers and also provides market-leading health and benefit decision support tools and ongoing health and wellness management.

Finance and Accounting Services

We serve clients by managing their critical finance, accounting and procurement processes. Our services include general accounting and reporting, billing and accounts receivable and purchasing, accounts payable and expense management services. We also offer wholesale and retail lockbox services and process auto and mortgage loans in the United States. With a global, dedicated team, we manage the core, end-to-end process areas of finance, accounting and procurement for some of the world’s most recognized brands.

Legal Business Services

We have been providing client support to law firms and corporate legal departments for over 20 years. We work across the litigation lifecycle, with particular focus on the legal discovery and review process. Our offerings include litigation support services, compliance and risk review and managed services support.

Workforce Learning Services

We are a provider of end-to-end learning services, designed to accelerate the productivity and development of our clients’ employees and extended work forces. Our global presence, superior innovation and expertise allow us to deliver performance-based learning services tailored to our clients’ unique strategic business goals. Our offerings include learning strategy and assessment, instructor management and learning administration.

 

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Applied Automation and Analytics Solutions

Many of our service offerings described above incorporate our applied automation and analytics solutions to increase their value and effectiveness to clients across all industries. We deploy these solutions to personalize millions of interactions, optimize service delivery and simplify complex processes. For example, our customer care services harness the power of applied analytics and automation to help our customer service agents work more efficiently across different communication channels. Our applied automation solutions track and learn the most efficient means to address common customer service needs as they occur in real time so that we can solve the same problem faster the next time around. The combination of applied automation and analytics allows us to identify new service demand patterns and opportunities quickly so that we can proactively address them on behalf of our clients.

Our Competitive Strengths

We possess a number of competitive strengths that distinguish us from our competitors, including:

Leadership in attractive growth markets. We are a leader in business process services with deep expertise in attractive industries, including healthcare and transportation. Our strong client relationships, deep industry expertise and differentiated, industry-specific solutions are competitive advantages that enable us to compete and grow in these attractive markets.

 

    Healthcare. U.S. healthcare spending is estimated to have represented greater than 15% of GDP in 2015 and is continuing to grow. As one of the most regulated industries, healthcare providers must balance increased utilization with heightened complexity and new financial pressures such as government budget challenges to significantly reduce reimbursements, reimbursement penalties for hospital readmissions and a shift from fee-for-service to “value-based” population health management. We are widely recognized by industry analysts as a leader in healthcare payer operations, serving 18 of the top 20 U.S. managed healthcare plans and we provide administrative and care management solutions to Medicaid programs and federally funded U.S. government healthcare programs in 29 states, Puerto Rico and the District of Columbia.

 

    Transportation. Traffic congestion continues to increase as urbanization and changing demographics take hold globally. As a result, optimized transportation systems are becoming critical to increase efficiency while maintaining strict safety requirements. Electronic toll collection, public transit and parking all represent key growth drivers as governments at all levels increasingly focus on transportation infrastructure. We are the second largest electronic toll collection service provider in the United States based on toll revenues collected through our systems in 2015, the largest U.S.-based commercial vehicle operations service provider in the United States with a 40% market share based on 2015 revenues and we are an award-winning innovator in parking management.

Differentiated suite of multi-industry service offerings at scale. We are experts in managing transaction-intensive processes and working directly with end-users to meet their needs in real-time. We are unique in our ability to offer our clients these business process services on a large scale and with high quality. Additionally, we are able to leverage our multi-industry services to bring the same scale and quality to our portfolio of industry-specific service offerings, such as healthcare claims management, employee benefits management and public transit fare collection.

Global delivery expertise. Our scale and global delivery network enables us to deliver our proprietary technology, differentiated service offerings and service capabilities expertly to clients around the world. We have approximately 290 delivery centers, including operations in India, the Philippines, Jamaica, Guatemala, Mexico, Romania, the Dominican Republic and the United States. Our global delivery model enables us to leverage lower-cost production locations, consistent methodologies and processes, time zone advantages and business continuity plans.

 

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Innovation and development. We innovate by developing and acquiring new technologies and capabilities that improve business processes. We are constantly creating the next generation of simple, automated and touch-less business processes to drive lower costs, higher quality and increased end-user satisfaction. Analytics allow us to transform big data into useful information that helps identify operational improvements and constituent insights. Additionally, we leverage robotic process automation and predictive analytics, combined with our deep subject matter expertise, to create intelligent services that improve security, increase speed, improve accuracy, quality and regulatory compliance and uncover insights that support better decision making and outcomes for our clients.

Stable recurring revenue model supported by a loyal, diverse client base. In 2015, 90% of our total revenues were recurring, and our contract renewal rate was 86%. We have a broad and diverse base of clients across geographies and industries, including Fortune 1000 companies and small and midsize businesses as well as governmental entities, in 42 countries. Our close client relationships and successful client execution support our stable recurring revenue model and high renewal rates.

Our Strategies

Our strategy is to drive leadership in attractive markets by leveraging and building on our competitive strengths. We intend to execute our strategy through increased business portfolio focus and operating discipline, enhanced sales and delivery capabilities and tightly aligned investments. Our strategy is designed to deliver value for our shareholders by delivering profitable growth, expanding operating margins and deploying a disciplined capital allocation strategy.

Specific elements of our strategy include the following:

Expand within attractive industries. The industries in which we operate have attractive revenue growth rates, generally in the mid-single digits. We intend to sharpen our focus and expand our business in industries with strong growth and profitability characteristics. We will employ a disciplined approach to portfolio management to complement our competitive strengths and build depth and breadth in our core businesses. Within the healthcare industry, we intend to leverage our data analytics, differentiated service offerings and industry know-how to continue to service payer, provider and core government healthcare clients. Within the transportation industry, we will leverage our global, end-to-end platforms to continue to deliver seamless travel experiences while providing back-end transaction processing and call center services for government clients globally.

Optimize and strengthen our services capabilities. We plan to optimize our services capabilities and strengthen several core areas, including transaction processing, customer care and prepaid card services. Within transaction processing, we intend to continue to build industry-specific service offerings and advance inbound and outbound processing capabilities. Within customer care, we intend to capitalize on our global scale, cost efficiencies and our ability to provide seamless communications between our clients and their end-users through traditional (e.g., voice) and digital (e.g., web, mobile, Internet of Things) channels. In prepaid cards, we plan to continue to leverage our scalable platform to help our clients simplify their payment disbursement processes.

Drive operational and delivery excellence. We intend to improve our margins through an ongoing focus on operational and delivery excellence and cost efficiency. In January 2016, we initiated a three-year strategic transformation program to support margin expansion through productivity enhancements and cost reductions, which we plan to continue following the completion of the Spin-Off. In particular, we plan to drive operational excellence through further automation and standardization of internal processes and with a continued focus on providing quality services.

Continue to advance next-generation platforms and capabilities. We intend to maintain our focus on innovation to create next-generation solutions aligned with our clients’ future needs and our growth strategies. We plan to advance our current platforms, further automate and personalize business processes and enhance data analytics capabilities to deliver value-added services for our clients.

 

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Engage, develop and support our people. We intend to continue to develop our employees by investing in training, processes and systems to equip them with modern tools that enable them to perform their jobs more efficiently. Further, we plan to strengthen our sales teams with improved and optimized coverage and effective talent management.

Sales and Marketing

We market our business process services to both potential and existing clients through our worldwide sales force and our business development team. Additionally, we have dedicated “solution architects” who work with clients to better understand their situation and develop a custom-tailored solution to meet their unique needs.

Our sales and marketing strategy is to go to market by industry to deliver key industry-specific and multi-industry service offerings to our clients. We focus on developing new prospects through market research and analysis, renewing expiring contracts and leveraging existing client relationships to offer additional services. We leverage our broad, multi-industry service offerings to package solutions through enterprise selling, while maintaining a disciplined approach to pricing and contracting. Our sales efforts typically involve extended selling cycles and our expertise in specific industries is critical to winning new business.

Our Geographies

We provide services globally and we have a diversified geographic delivery network. In 2015, approximately 22% of our revenues were generated by clients outside the United States. In 2015, our revenues by geography were as follows: $5,166 million in the United States (78% of total revenues), $797 million in Europe (12% of total revenues) and $699 million from the rest of the world (10% of total revenues).

Innovation and Research and Development

Our innovation and research and development (R&D) capabilities are critical to our client value proposition and competitive positioning. Our investments in innovation align with our growth strategies and are driven by a view of future needs and required competencies developed in close partnership with our clients and R&D partners. We are investing in attractive markets, such as healthcare and transportation, and building on proven platforms to create services that distinguish us from our competitors. In addition, we expand our innovation capabilities through acquisitions that offer new capabilities and access to complementary services and technologies.

Our innovation and R&D are focused on three key areas: automation, personalization and analytics.

Automation—Create simple, automated and touch-less business processes to drive lower cost, higher quality and increased agility. Businesses require agility to quickly respond to market changes and new customer requirements. To enable greater business process agility, our R&D goals are to simplify, automate and enable business processes via flexible platforms that run on robust and scalable infrastructures. Automation of business processes benefits from our strong image, video and natural language processing, as well as our machine learning capabilities. Application of these methods to business processes enables technology to perform tasks that today are performed manually such as providing automation solutions in transportation by aggregating and automatically applying business rules to simplify toll payments and by using our state of the art video and image analytics to reduce the need for manual review of license plates in tolling and toll adjustment scenarios; analyzing data on eligibility claims and checking for correctness on applications. The scope of automation is applied across our portfolio of services and is a key element of our ongoing strategy of modern, efficient services.

Personalization—Augment humans by providing secure, real-time, context-aware personalized products and services. Whether business correspondence, personal communication, manufactured items or an information

 

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service, personalization increases the value to the recipient. Our R&D investments lead to technologies that improve the efficiency, economics and relevance of business services, such as customer care and health and welfare services. In our current customer care service offerings, the human touch is seamlessly added as our software automatically takes telephony data and merges it with customer records pulled from multiple sources to seamlessly create customized scripts and flows. This allows the agent to have the caller’s data at their fingertips and provide a more personal experience to the customer—whether on the phone or online. In toll systems, our systems automatically pull up a customer’s name, verify their information and prompt them for unpaid tolls. In transportation, our mobile app aggregates and calculates the time, cost, carbon footprint and health benefits from walking, biking, driving, parking and taking public transit, as well as the emerging private transportation options, such as app-based taxi alternatives and car sharing, and presents commuters with the shortest, cheapest and most sustainable way to get to a destination. For health and welfare, our systems provide state of the art personalized delivery to insure the best utilization of funds for the neediest populations.

Analytics—Transform big data into useful information to support better decision making. Competitive advantage can be achieved by better utilizing available and real-time information. Today, information resides in an ever increasing universe of servers, repositories and formats. The vast majority of information is unstructured, including text, images, voice and videos. We are using natural language processing and semantic analysis to make sense of unstructured information and we are developing proprietary methods for prescriptive analytics applied to business processes. Here, we seek to better manage large data systems in order to extract business insights to provide our clients with actionable recommendations. Tailoring these methods to various industry applications leads to new customer value propositions. In hospitals, we mine usage and clinical indicators to improve patient experiences. We also help our healthcare clients identify waste and fraud by identifying networks of providers and patients with suspicious behavior, such as sudden and dramatic increases in a provider’s level of business or unusual or illogical patient treatment sequences. In transportation, we enable transport and parking operators to better understand and predict commuter needs, including adherence to schedules, passenger loading levels, car park utilization rates and the impact of varying factors such as weather and schedule variations. In customer care, we identify vital business patterns and trends for our customers to improve their businesses and meet their customer needs.

Intellectual Property

Our general policy is to seek patent protection for those inventions likely to be incorporated into our products and services or where obtaining such proprietary rights will improve our competitive position. We own approximately 660 patents and pending applications. Our patent portfolio evolves as new patents are awarded to us and as older patents expire. These patents expire at various dates, generally 20 years from their original filing dates. While we believe that our portfolio of patents and applications has value, in general no single patent is essential to our business or any individual segment. In addition, any of our proprietary rights could be challenged, invalidated or circumvented, or may not provide significant competitive advantages.

Our business relies on software, provided to an approximately equal extent by both internal development and external sourcing, to deliver our services in our businesses. We both develop our own software for inclusion in our products and services, and incorporate externally sourced software into our products and services. We also partner with third-party software providers to develop software. With respect to internally developed software, we claim copyright on all such software, registering works which may be accessible to third parties. In addition, we rely on maintaining source code confidentiality to assure our market competitiveness. With respect to externally sourced software, we rely on contracts assuring our continued access for our business usage.

In the United States, we own more than 165 trademarks, which are either registered or applied for, reflecting the many businesses we participate in. These trademarks may have a perpetual life, subject to renewal every 10 years and may be subject to cancellation or invalidation based on certain use requirements and third-party challenges, or on other grounds. We vigorously enforce and protect our trademarks.

 

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People and Culture

We draw on the business and technical expertise of our talented and diverse global workforce to provide our clients with high-quality services. Our business leaders bring a strong diversity of experience in our industry and a track record of successful performance and execution.

We have historically operated according to the human resource policies and programs of Xerox, which are designed to meet general governance and regulatory requirements. Xerox has a diversity and inclusion program, which is overseen by Xerox’s human resources department. Xerox promotes understanding and inclusion through a comprehensive set of diversity initiatives and strategies, including addressing under-representation by identifying shortfalls and developing action plans to close those gaps and through work-life programs that assist employees in many aspects of their personal lives. Additionally, Xerox informs and educates all employees on diversity programs, policies and achievements. As an independent company, we intend to continue our commitment to diversity and inclusion and implement similar policies and programs.

In the United States, Conduent will comply with Equal Employment Opportunity guidelines and all applicable federal, state and local laws that govern the hiring and treatment of its employees.

As of September 30, 2016, we had approximately 93,700 employees globally, with 48% located in the United States and the remainder located primarily in India, the Philippines, Jamaica, Guatemala and Mexico.

Training and Talent Development

We believe our people are our most important asset, which is why we invest in employee growth and development programs. We are focused on building a workplace where our people can do their best work and have access to the tools and resources they need to perform their jobs more effectively. We are building a culture of learning and have shifted from delivering training to incorporating learning into day-to-day work.

In 2014 we launched an industry-leading, innovative virtual learning platform for our employees. It includes custom created content, curated content from third-party sources and a social learning platform that allows employees to share their experiences with their colleagues worldwide. Since its launch, the platform has connected more than 20,000 employees and helped them to develop the skills and knowledge needed to create and deliver best-in-class client solutions.

We also provide tuition assistance to employees to work toward obtaining degrees through accredited institutions. In addition, we have a unique partnership with a distinctive grant program which allows employees pursuing a degree to take courses free of charge.

We have a strong performance management system in place that requires all employees to engage with their managers on goal-setting and performance feedback, enabling personal and professional development. There is a strong emphasis on mentorship and coaching, both formal and informal, to help employees get to the next level in their careers. We enable this by developing management capability for our front line leaders to ensure they are able to coach and mentor their teams and engage in constructive and continuous two-way dialogue.

Corporate Ethics

Our commitment to business ethics represents more than a declaration to do the right thing. It has become an integral part of the way we do business. We have historically operated according to the ethics and compliance program of Xerox, which is designed to meet general governance and specific industry and regulatory requirements with a focus on values, culture and performance with integrity. Xerox has a business ethics program, which is overseen by a business ethics office, and a code of business conduct, which will serve as the foundation of our business ethics program. The code of business conduct makes clear Xerox’s expectations for ethical leadership, performance with integrity and compliance with company policies and the law. In addition, the code of business conduct embodies and reinforces Xerox’s commitment to integrity and helps employees

 

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resolve ethics and compliance concerns consistent with our core values and legal and policy controls. In addition, as Xerox employees, our employees are required to complete business ethics training annually and Xerox regularly solicits their input to gauge the state of Xerox’s ethical culture and help identify areas for improvement. As an independent company, we intend to continue our commitment to business ethics and implement similar policies and programs.

Competition

Although we encounter competition in all areas of our portfolio, we lead across many areas of our principal businesses. We compete on the basis of technology, performance, price, quality, reliability and customer service and support. We participate in a highly competitive and rapidly evolving market, driven by changes in industry standards and demands of customers to become more efficient. Our competitors range from large international companies to relatively small firms. Our competitors include:

 

    Large multinational service providers, such as Accenture, Aon Hewitt, Hewlett-Packard Enterprise, Cognizant and IBM;

 

    Primarily business process outsourcing service providers, such as Convergys, Genpact, Teletech and Teleperformance; and

 

    Smaller niche business processing service providers and in-house departments that perform functions that could be outsourced to us.

Backlog

Backlog, or the value of the remaining term of our service contracts, is not a metric that we regularly use to measure our business. However, approximately 90% of our revenues in 2015 were tied to recurring revenue contracts.

Seasonality

Our revenues can be affected by various factors such as our clients’ demand pattern for our services. These factors have historically resulted in higher revenues and profits in the fourth quarter.

Facilities

We lease and own numerous facilities worldwide with larger concentrations of space in Kentucky, New Jersey, California, Mexico, Guatemala, the Philippines, Jamaica, Romania and India. Our owned and leased facilities house general offices, sales offices, service locations, call centers and distribution centers. The size of our property portfolio as of August 31, 2016 was approximately 12.2 million square feet at an annual operating cost of approximately $294 million and comprised 513 leased properties and 8 owned properties. We believe that our current facilities are suitable and adequate for our current businesses. Because of the interrelation of our business segments, each of the segments use substantially all of these properties at least in part.

As a result of implementing our strategic transformation program as well as various productivity initiatives, several leased and owned properties may become surplus over the next three years. We are obligated to maintain our leased surplus properties through required contractual lease periods and plan to dispose of or sublease these properties.

Regulatory

We are subject to a variety of laws and regulations in both the United States and in many other jurisdictions around the world. As a result of the complexity of our operations and services we are subject to regulation at the U.S. federal, state and local level and at the various levels of government in the countries where we have operations and deliver services. We are also subject to regulation by regional bodies such as the European Union.

 

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In addition, the terms of our service contracts with our customers commonly require that we comply with applicable laws and regulations. In certain contracts, we are required to comply even if such laws and regulations apply to our clients but not to us. Also, in some instances our client engagements may expose us to laws and regulations in jurisdictions in which they are located.

If we fail to comply with any applicable laws and regulations, we may be restricted in our ability to provide services, and may also be subject to legal actions and penalties, any of which could materially adversely affect our operations.

In the United States, given the nature of our services in finance, healthcare, customer care, government contracting, human resources and other industries, we are subject to a wide-ranging set of laws and regulations, such as the Gramm-Leach-Bliley Act (also known as the Financial Modernization Act of 1999), as amended, the Currency and Foreign Transactions Reporting Act of 1970 (commonly known as the Bank Secrecy Act), as amended, and anti-money laundering compliance programs, the Fair Credit Reporting Act, as amended, the Fair and Accurate Credit Transactions Act of 2003, as amended, the Right to Financial Privacy Act of 1978, as amended, the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT ACT) Act of 2001, as amended, the Fair Debt Collections Practices Act, as amended, the Truth in Lending Act, as amended, the Home Owners Loan Act, as amended, the Electronic Fund Transfer Act, as amended, the Equal Credit Opportunity Act, as amended, and the Real Estate Settlement Procedures Act of 1974, as amended, the Telemarketing Consumer Fraud and Abuse Prevention Act, as amended, and the Telemarketing Sales Rule, the Telephone Consumer Protection Act of 1991, as amended, and rules promulgated by the Federal Communications Commission, the CAN-SPAM Act of 2003, as amended, the Health Insurance Portability and Accountability Act of 1996 (HIPAA), as amended, the Federal Trade Commission Act, as amended, the False Claims Act, as amended, the Family Educational Rights and Privacy Act, as amended, the Communications Act of 1934, as amended, the Electronic Communications Privacy Act of 1986, as amended, the Patient Protection and Affordable Care Act, as amended, and rules promulgated by the Department of Health and Human Services’ Centers for Medicare and Medicaid Services and other applicable regulations in these areas, as well as regulation by U.S. agencies such as the SEC, the Federal Reserve, the Federal Deposit Insurance Corporation, the National Credit Union Administration, the Commodity Futures Trading Commission, the Federal Financial Institutions Examination Council, the Office of the Comptroller of the Currency and the Office of Thrift Supervision.

We obtain, process, transmit and store information relating to identifiable individuals, both in our role as a service and technology provider and as an employer. As a result, we are subject to numerous U.S. (both federal and state) and foreign jurisdiction laws and regulations designed to protect individually identifiable information, including HIPAA and the HIPAA regulations governing, among other things, the privacy, security and electronic transmission of individually identifiable health information, and the European Union Directive on Data Protection (Directive 95/46/EC).

Additionally, the global nature of our business exposes us to various anti-bribery and anti-corruption laws, including the U.S. Foreign Corrupt Practices Act of 1977, as amended, the UK Bribery Act 2010, as amended, and other similar laws and regulations. For the same reason we are subject to laws and regulations governing foreign trade, such as the Arms Export Control Act, as amended, as well as by government bodies such as the Commerce Department’s Bureau of Industry and Security, the State Department’s Directorate of Defense Trade Controls and the Treasury Department’s Office of Foreign Assets Control.

We are also subject to laws in the United States, the United Kingdom and the European Union that are intended to limit the impact of outsourcing on employees in those countries.

 

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Legal Proceedings

There are no legal proceedings pending against us or legal matters of significance, other than the three mentioned below, which are likely to have a material adverse effect on our business, results of operations and financial conditions. The Company believes it has recorded adequate provisions for any such matters and, as of June 30, 2016, it was not reasonably possible that a material loss had been incurred in connection with such matters in excess of the amounts recognized in its financial statements.

State of Texas v. Xerox Corporation, Xerox State Healthcare, LLC and ACS State Healthcare, LLC: On May 9, 2014, the State of Texas, via the Texas Office of Attorney General (the “State”), filed a lawsuit in the 53rd Judicial District Court of Travis County, Texas. The lawsuit alleges that Xerox Corporation, Xerox State Healthcare, LLC and ACS State Healthcare (collectively, the “Xerox Defendants”) violated the Texas Medicaid Fraud Prevention Act in the administration of its contract with the Texas Department of Health and Human Services (“HHSC”). The State alleges that the Xerox Defendants made false representations of material facts regarding the processes, procedures, implementation and results regarding the prior authorization of orthodontic claims. The State seeks recovery of actual damages, two times the amount of any overpayments made as a result of unlawful acts, civil penalties, pre- and post-judgment interest and all costs and attorneys’ fees. The State references the amount in controversy as exceeding hundreds of millions of dollars. The Xerox Defendants filed their Answer in June, 2014 denying all allegations. The Xerox Defendants will continue to vigorously defend themselves in this matter. We do not believe it is probable that we will incur a material loss in excess of the amount accrued for this matter. In the course of litigation, we periodically engage in discussions with plaintiff’s counsel for possible resolution of the matter. Should developments cause a change in our determination as to an unfavorable outcome, or result in a final adverse judgment or settlement for a significant amount, there could be a material adverse effect on our results of operations, cash flows and financial position in the period in which such change in determination, judgment or settlement occurs.

Dennis Nasrawi v. Buck Consultants et al.: On October 8, 2009, plaintiffs filed a lawsuit in the Superior Court of California, Stanislaus County and on November 24, 2009, the case was removed to the U.S. Court for the Eastern District of California, Fresno Division. Plaintiffs allege actuarial negligence against Buck Consultants, LLC (“Buck”) for the use of faulty actuarial assumptions in connection with the 2007 actuarial valuation for the Stanislaus County Employees Retirement Association (“StanCERA”). Plaintiffs allege that the employer contribution rate adopted by StanCERA based on Buck’s valuation was insufficient to fund the benefits promised by the County. On July 13, 2012, the Court entered its ruling that the plaintiffs lacked standing to sue in a representative capacity on behalf of all plan participants. The Court also ruled that plaintiffs had adequately pleaded their claim that Buck allegedly aided and abetted StanCERA in breaching its fiduciary duty. Plaintiffs then filed their Fifth Amended Complaint and added StanCERA to the litigation. Buck and StanCERA filed demurrers to the amended complaint. On September 13, 2012, the Court sustained both demurrers with prejudice, completely dismissing the matter and barring plaintiffs from refiling their claims. Plaintiffs appealed and ultimately the California Court of Appeals (Sixth District) reversed the trial court’s ruling and remanded the case back to the trial court. Buck entered into a stay agreement with plaintiffs that essentially postpones this litigation pending the outcome of parallel litigation between plaintiffs and StanCERA. Buck will continue to aggressively defend these lawsuits.

On January 5, 2016, the Consumer Financial Protection Bureau (the “CFPB”) notified Xerox Education Services, Inc. (“XES”) that, in accordance with the CFPB’s discretionary Notice and Opportunity to Respond and Advise (“NORA”) process, the CFPB’s Office of Enforcement is considering recommending that the CFPB take legal action against XES, alleging that XES violated the Consumer Financial Protection Act’s prohibition of unfair practices. Should the CFPB commence an action, it may seek restitution, civil monetary penalties, injunctive relief or other corrective action. The purpose of a NORA letter is to provide a party being investigated an opportunity to present its position to the CFPB before an enforcement action is recommended or commenced. This notice stems from an inquiry that commenced in 2014 when XES received and responded to a Civil Investigative Demand containing a broad request for information. During this process, XES self-disclosed to the

 

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Department of Education and the CFPB certain adjustments of which it had become aware that had not been timely made relating to its servicing of a small percentage of third-party student loans under outsourcing arrangements for various financial institutions. The CFPB and the Department of Education, as well as certain states’ attorney general offices and other regulatory agencies, began similar reviews. XES has cooperated and continues to fully cooperate with all regulatory agencies, and XES has submitted its NORA response. We cannot provide assurance that the CFPB or another party will not ultimately commence a legal action against XES in this matter nor are we able to predict the likely outcome of the investigations into this matter. We could in future periods incur judgments or enter into settlements in connection with this matter and there could be a material adverse effect on our results of operations, cash flows and financial position in the period in which such change in judgment or settlement occurs.

Other

Conduent Incorporated is a New York corporation, organized in 2016. Our principal executive offices are located at 233 Mount Airy Road, Suite 100, Basking Ridge, NJ 07920. Our telephone number is (908) 758-1200. Our website address is www.conduent.com. Information contained on, or connected to, our website or Xerox’s website does not and will not constitute part of this Information Statement or the Registration Statement on Form 10 of which this Information Statement is a part.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together with our accompanying historical Combined and Condensed Combined Financial Statements and the notes thereto included elsewhere in this Information Statement as well as the discussion in the section of this Information Statement entitled “Business.” This discussion contains forward-looking statements that involve risks and uncertainties. These statements can be identified by the fact that they do not relate strictly to historical or current facts, but rather are based on current expectations, estimates, assumptions and projections about the business process outsourcing industry and our business and financial results. Forward-looking statements often include words such as “anticipates,” “estimates,” “expects,” “projects,” “intends,” “plans,” “believes” and words and terms of similar substance in connection with discussions of future operating or financial performance. Our actual results may vary materially from those expressed or implied in our forward-looking statements. Accordingly, undue reliance should not be placed on any forward-looking statement made by us or on our behalf. Our actual results could differ materially from the results contemplated by these forward-looking statements due to a number of factors, including those discussed in the sections of this Information Statement entitled “Risk Factors” and “Cautionary Statement Concerning Forward-Looking Statements.”

Introduction

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand the financial condition and results of operations of the BPO Business. MD&A is provided as a supplement to, and should be read in conjunction with, our accompanying historical Combined and Condensed Combined Financial Statements and the notes thereto. MD&A provides additional information about our operations, current developments, financial condition, cash flows and results of operations. MD&A is organized as follows:

 

    Overview. This section provides a general description of our business, as well as recent developments we believe are important in understanding our results of operations and financial condition or in understanding anticipated future trends.

 

    Critical Accounting Policies. This section identifies and summarizes those accounting policies that we consider important to our results of operations and financial condition, require significant judgment and require estimates on the part of management in application.

 

    Results of Operations. This section provides an analysis of our results of operations for the three years ended December 31, 2015 and the six months ended June 30, 2016 and June 30, 2015.

 

    Capital Resources and Liquidity. This section provides a discussion of our current financial condition and an analysis of our cash flows for the three years ended December 31, 2015 and the six months ended June 30, 2016 and June 30, 2015. This section also provides a discussion of our contractual obligations and commitments and off-balance sheet arrangements. Included in this section is a discussion of the amount of financial capacity available to fund our future commitments and ongoing operating activities.

 

    Market Risk Management. This section presents information about our market sensitive financial instruments and exposure to market risk as of December 31, 2015.

For purposes of this MD&A section, we use the terms “Conduent Incorporated,” “Conduent,” “the Company,” “we,” “us” and “our” to refer to Xerox’s business process outsourcing business and related operations. References in this MD&A section to “Xerox” refer to Xerox Corporation, collectively with its consolidated subsidiaries other than, for all periods following the Spin-Off, Conduent.

 

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OVERVIEW

Spin-off Transaction

On January 29, 2016, Xerox announced plans for the complete legal and structural separation of the BPO Business from Xerox. To effect the separation, Xerox will complete the Internal Transactions described under “Certain Relationships and Related Party Transactions—Agreements with Xerox—Separation and Distribution Agreement.” Following the Internal Transactions, Conduent will hold the BPO Business. The Spin-Off will be completed by way of a pro rata dividend of Conduent shares held by Xerox to its stockholders of record as of the Record Date. Following the Spin-Off, Xerox stockholders will own 100% of the outstanding shares of common stock of Conduent and Conduent will operate as an independent, publicly traded company.

Our Business

With revenues of nearly $7.0 billion in 2015, we are a leading provider of business process services with expertise in transaction-intensive processing, analytics and automation. We serve as a trusted business partner in both the front office and back office, enabling personalized, seamless interactions on a massive scale that improve end-user experience.

We believe our addressable market size in the global business process service industry is estimated at nearly $260 billion in 2016, with expected growth rates in the mid-single digits through 2019. We have leadership positions in key market segments, including healthcare and transportation, which are expected to grow at 8% and 5% on a compounded annual basis through 2019, respectively.

We organize our business around three main reportable segments, Healthcare, Public Sector and Commercial Industries:

 

    Healthcare: We provide industry-centric business process services to clients across the healthcare industry, including providers, payers, employers, pharmaceutical and life science companies and government agencies.

 

    Public Sector: We provide government-centric business process services to U.S. federal, state and local and foreign governments.

 

    Commercial Industries: We provide business process services and customized solutions to clients in a variety of industries (other than healthcare).

Our Government Health Enterprise (“HE”) Medicaid Platform business, where we are limiting our focus to implementing and maintaining systems for our current clients, and our Student Loan business, which is in run-off, as well as non-allocated expenses and inter-segment eliminations, are included in Other in our segment reporting.

Recent Developments

Refocusing of Government Healthcare Business

Late in the third quarter of 2015, we determined that we would not fully complete the HE Medicaid platform implementation projects in California and Montana. However, we would continue to process Medicaid claims using existing legacy systems in those states, thus providing uninterrupted service for the states’ healthcare providers and constituents.

As a result of the determination that we would not fully complete those two platform implementations, we recorded a pre-tax charge (the “HE charge”) of $389 million ($237 million after-tax). The charge included $116 million for the write-off of contract receivables (primarily non-current), $34 million related to the non-cash

 

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impairment of the HE software and deferred contract set-up and transition costs and $23 million for other related assets and liabilities. The remainder of the charge was primarily related to settlement costs including payments to subcontractors and would result in cash outflows in future quarters. Of the $389 million charge, $116 million was recorded as a reduction to revenues, while the remaining $273 million was recorded to costs of outsourcing.

We have finalized negotiations with both California and Montana, and we are currently negotiating with our various third-party subcontractors on a final settlement. At this time, we believe we have recorded our best estimate of our liabilities associated with these settlements; however, this estimate is subject to change when negotiations are finalized.

The above noted developments followed the change in strategy in our Government Healthcare business announced in July 2015, to focus our future HE platform implementations on current Medicaid customers and to discontinue investment in and sales of the Xerox Integrated Eligibility System (“IES”). This change in strategy resulted in a pre-tax non-cash software impairment charge of $146 million ($89 million after-tax) in the second quarter of 2015 associated with our HE and IES software platforms.

We remain committed to the implementation and ongoing operation of the HE platform for our other state clients. These HE platform implementations are reported in Other.

As a result of the significant impact of the HE charge and the software impairment charge on our reported revenues, earnings and key metrics for the period, we also discuss our results excluding the impact of these charges. These adjusted results are noted as “adjusted” in the discussion below. Refer to the “Non-GAAP Financial Measures” section for an explanation of these non-GAAP financial measures.

Acquisitions and Divestitures

Consistent with our strategy to enhance our service offerings, we completed several acquisitions during 2015. Refer to Note 3—Acquisitions in our Combined Financial Statements for additional information regarding our 2015 acquisitions.

In December 2014, we announced an agreement to sell our Information Technology Outsourcing (“ITO”) business to Atos SE and began reporting it as a Discontinued Operation. The sale was completed on June 30, 2015. Refer to Note 4—Divestitures in our Combined Financial Statements for additional information.

Currency Impact

To understand the trends in our business, we believe that it is helpful to analyze the impact of changes in the translation of foreign currencies into U.S. Dollars on revenue and expenses. We refer to this analysis as “currency impact” or “the impact from currency” or “constant currency”. In 2016, 2015 and 2014, this impact is calculated by translating current period activity in local currency using the comparable prior-year period’s currency translation rate.

Key Trends and Drivers

Six Months ended June 30, 2016

Total revenues in the first half of 2016 of $3.3 billion decreased 2% compared to the prior-year period with a 1-percentage point negative impact from currency, as growth in Healthcare was more than offset by declines in Commercial Industries. Operating margin for the first half of 2016 of 4.5% improved 0.6-percentage points as compared to the first half of 2015, reflecting cost and productivity improvements, including benefits from our strategic transformation program, as well as lower expenses from our determination to refocus our Government Healthcare business, especially our HE platform implementations.

 

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Year ended December 31, 2015

Total revenues of $6.7 billion in 2015 declined 4% compared to the prior year with a 2-percentage point negative impact from currency. On an adjusted1 basis, excluding the HE charge, total revenues of $6.8 billion declined 2% from the prior year and were flat at constant currency. Our decision to not fully complete the HE platform implementations in California and Montana and a few specific contracts contributed to revenue declines, which were offset by moderate inorganic and organic contributions. 2015 full-year operating margin of 4.8% decreased 1.4-percentage points from 2014. The decline was driven by targeted resource and other investments and increased expenses for our HE platform implementations prior to the refocusing of that business as described above.

(1) Refer to the Operating income / Margin reconciliation table in the “Non-GAAP Financial Measures” section.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires us to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying Combined Financial Statements and notes thereto. In preparing these Combined Financial Statements, we have made our best estimates and judgments of certain amounts included in the Combined Financial Statements giving due consideration to materiality. However, application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates. Although we have listed a number of accounting policies below which we believe to be most critical, we also believe that all of our accounting policies are important to the reader. Therefore, please also refer to the Notes to the Audited Combined Financial Statements and Notes to the Unaudited Condensed Combined Financial Statements for a more detailed description of these and other accounting policies of the BPO Business.

Revenue Recognition

Application of the various accounting principles in U.S. GAAP related to the measurement and recognition of revenue requires us to make judgments and estimates. Complex arrangements with nonstandard terms and conditions may require significant contract interpretation to determine the appropriate accounting. Refer to Note 1—Basis of Presentation and Summary of Significant Accounting Policies—New Accounting Standards and Accounting Changes—Revenue Recognition in the Combined Financial Statements for additional information regarding our revenue recognition policies.

A significant portion of the BPO Business revenue is recognized based on objective criteria that do not require significant estimates or uncertainties. For example, transaction volumes, time and material and cost reimbursable arrangements are based on specific, objective criteria under the contracts. Accordingly, revenues recognized under these contracts do not require the use of significant estimates that are susceptible to change. Revenue recognized using the percentage-of-completion (“POC”) accounting method does require the use of estimates and judgment as discussed below.

We recognize revenues when we have persuasive evidence of an arrangement, the services have been provided, the transaction price is fixed or determinable and collectability is reasonably assured. During fiscal year 2015, approximately 81% of our revenue was recognized based on transaction volumes, approximately 8% was fixed fee based, wherein our revenue is earned as we fulfill our performance obligations under the arrangement, approximately 2% was related to cost reimbursable contracts, approximately 3% of our revenue was recognized using POC accounting and the remaining 6% was related to time and material contracts. Our revenue mix is subject to change due to the impact of changing customer requirements, acquisitions, divestitures, new business and lost business.

As noted above, a portion of our revenue (approximately 3%) is recognized using the POC accounting method. This method requires the use of significant estimates and judgment. The POC methodology is normally

 

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applied to certain of our larger, more complex, and longer term outsourcing contracts involving system development and implementation services, primarily in government healthcare and certain government transportation contracts. In addition, we had unbilled receivables totaling $224 million and $351 million at December 31, 2015 and 2014, respectively, representing revenues recognized but not yet billable under the terms of our POC contracts. The decrease in unbilled revenues in 2015 is primarily due to developments in certain implementations of our HE Medicaid platform. See “—Overview – Recent Developments—Refocusing of Government Healthcare Business” for additional information on the developments in certain implementations of our HE Medicaid platform.

The POC accounting methodology involves recognizing probable and reasonably estimable revenue using the percentage of services completed based on a current cumulative cost incurred to estimated total cost basis and a reasonably consistent profit margin over the period. Due to the long-term nature of these arrangements, developing the estimates of cost often requires significant judgment. Factors that must be considered in estimating the progress of work completed and ultimate cost of the projects include, but are not limited to, the availability of labor and labor productivity, the nature and complexity of the work to be performed and the impact of delayed performance. If changes occur in delivery, productivity or other factors used in developing the estimates of costs or revenues, we revise our cost and revenue estimates, which may result in increases or decreases in revenues and costs. Such revisions are reflected in income in the period in which the facts that give rise to that revision become known. We perform ongoing profitability analysis of our POC services contracts in order to determine whether the latest estimates require updating. Key factors reviewed by the company to estimate the future costs to complete each contract are future labor costs, future product costs, expected productivity efficiencies, achievement of contracted milestones and performance goals as well as potential penalties for milestone and system implementation delays.

If at any time our estimates indicate the POC contract will be unprofitable, the entire estimated loss for the remainder of the contract is recorded immediately in cost of services. This results in the contract being recorded at a zero profit margin going forward with recognition of an equal amount of revenues and costs over the remaining contract term. A zero profit margin may also be applied when it is impractical to estimate specific amounts or ranges of contract revenues and costs; however, we can at least determine that we will not incur a loss on a particular contract.

Additionally, as noted previously, we apply the POC accounting method for our larger, more complex and longer term outsourcing contracts. The POC accounting process is particularly complex and challenging for these arrangements due to their significant scope and duration, the highly technical nature of the implementations, the potential for additional costs related to productivity and performance penalties and other delivery factors. Accordingly, based on the significance of these projects, we continually monitor our progress and consider the potential for increased costs as well as risks and uncertainties in our estimates of revenues and costs under the POC accounting methodology. To the extent possible, we attempt to mitigate these risks through operational changes, project oversight and process improvements.

Allowance for Doubtful Accounts and Credit Losses

We continuously monitor collections and payments from our customers and record a provision for estimated credit losses based on specific customer account analysis as well as changes in client credit-worthiness, payment terms and collection trends. We also regularly review historical experience adjusted for current economic trends and conditions. Any change in the assumptions used in analyzing a specific account receivable may result in additional provisions being recognized in the period in which the change occurs. Although bad debt provisions have not been material over the past three years, due to the level of accounts receivables including the portion that is unbilled, we critically review accounts to ensure collectability.

Refer to Note 5—Accounts Receivables, Net in the Combined Financial Statements for additional information regarding our allowance for doubtful accounts.

 

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Capitalization of Outsourcing Contract Costs

In connection with our services arrangements, we incur and capitalize costs to originate these long-term contracts and to perform the migration, transition and setup activities necessary to enable us to perform under the terms of the arrangement. Certain initial direct costs of an arrangement are capitalized and amortized over the contractual service period of the arrangement to cost of services. From time to time, we also provide inducements to customers in various forms, including contractual credits, which are capitalized and amortized as a reduction of revenue over the term of the contract. We regularly review costs to determine appropriateness for deferral in accordance with the relevant accounting guidance. Key estimates and assumptions that we must make include projecting future cash flows in order to assess the recoverability of deferred costs. To assess recoverability, undiscounted estimated cash flows of the contract are projected over its remaining life and compared to the carrying amount of contract related assets, including the unamortized deferred cost balance. Such estimates require judgment and assumptions, which are based upon the professional knowledge and experience of our personnel. Key factors that are considered in estimating the undiscounted cash flows include projected labor costs and productivity efficiencies. A significant change in an estimate or assumption on one or more contracts could have a material effect on our results of operations.

Capitalization of Software Development Costs

We capitalize certain costs incurred to develop commercial software products to be sold, leased or otherwise marketed after establishing technological feasibility, and we capitalize costs to develop or purchase internal-use software. Significant estimates and assumptions include: determining the appropriate period over which to amortize the capitalized costs based on estimated useful lives, estimating the marketability of the commercial software products and related future revenues and assessing the unamortized cost balances for impairment. For commercial software products, determining the appropriate amortization period is based on estimates of future revenues from sales of the products. We consider various factors to project marketability and future revenues, including an assessment of alternative solutions or products, current and historical demand for the product, and anticipated changes in technology that may make the product obsolete. For internal-use software, the appropriate amortization period is based on estimates of our ability to utilize the software on an ongoing basis. To assess the recoverability of capitalized software costs, we consider estimates of future revenue, costs and cash flows. Such estimates require assumptions about future cash inflows and outflows, and are primarily based on the historical experience and expectations regarding future revenues. A significant change in an estimate related to one or more software products could result in a material change to our results of operations.

Refer to Note 6—Land, Buildings, Equipment and Software, Net in the Combined Financial Statements for additional information regarding capitalized software costs including a discussion of related impairments recorded in 2015.

Business Combinations

The accounting for business combinations requires the use of significant estimates and assumptions in the determination of the fair value of assets acquired and liabilities assumed in order to properly allocate the purchase price consideration between assets that are depreciated and amortized from goodwill. Our estimates of the fair values of assets and liabilities acquired are based upon assumptions believed to be reasonable and, when appropriate, include assistance from independent third-party valuation firms. Refer to Note 3—Acquisitions in the Combined Financial Statements for additional information regarding the allocation of the purchase price consideration for our acquisitions.

Because we are primarily a services business, which normally has a lower level of tangible assets, our acquisitions typically result in significant amounts of goodwill and other intangible assets. These assets affect the amount of future period amortization expense and possible expense we could incur as a result of an impairment. Acquired intangible assets are primarily related to customer relationships. As a result of the acquisition of

 

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Affiliated Computer Services, Inc. (“ACS”) by Xerox in 2010, as well as other subsequent acquisitions, we have a significant amount of acquired intangible assets and goodwill. Acquired intangible assets and goodwill were $1.4 billion and $4.9 billion at December 31, 2015, respectively.

Intangible Assets

The fair values of identifiable intangible assets are primarily estimated using an income approach. These estimates include market participant assumptions and require projected financial information, including assumptions about future revenue growth and costs necessary to facilitate the projected growth. Other key inputs include assumptions about technological obsolescence, customer attrition rates, brand recognition, the allocation of projected cash flows to identifiable intangible assets and discount rates. We regularly review intangible assets with finite lives for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Factors we consider important which could trigger an impairment review include the following:

 

    significant underperformance relative to historical or projected future operating results;

 

    significant changes in the manner of our use of the acquired assets or the strategy for our overall business; and

 

    significant negative industry or economic trends.

When we determine that the carrying value of intangibles and long-lived assets may not be recoverable based upon the existence of one or more of the above indicators of potential impairment, we assess whether an impairment has occurred based on whether net book value of the assets exceeds the related projected undiscounted cash flows from these assets. We consider a number of factors, including past operating results, budgets, economic projections, market trends and product development cycles in estimating future cash flows. Differing estimates and assumptions as to any of the factors described above could result in a materially different impairment charge, if any, and thus materially different results of operations. In the three-year period ended December 31, 2015, we did not record any material impairments of acquired intangible assets except those related to the sales or shutdown of businesses.

Goodwill

Goodwill is not amortized but rather is tested for impairment annually or more frequently if an event or circumstance indicates that an impairment may have been incurred. Events or circumstances that might indicate an interim evaluation is warranted include, among other things, unexpected adverse business conditions, macro and reporting unit specific economic factors, supply costs, unanticipated competitive activities and acts by governments and courts.

Application of the annual goodwill impairment test requires judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units, assignment of goodwill to reporting units and the assessment—qualitatively or quantitatively—of the fair value of each reporting unit against its carrying value. We determined that our reporting units were the same as our operating segments and, therefore, the BPO Business is comprised of three reporting units with goodwill balances. Our annual impairment test of goodwill was performed in the fourth quarter of 2015. We elected to utilize a quantitative assessment of the recoverability of our goodwill balances for each of our reporting units.

In our quantitative test, we estimate the fair value of each reporting unit by weighting the results from the income approach (discounted cash flow methodology) and market approach. These valuation approaches require significant judgment and consider a number of factors that include, but are not limited to, expected future cash flows, growth rates and discount rates, and comparable multiples from publicly traded companies in our industry. In addition, we are required to make certain assumptions and estimates regarding the current economic environment, industry factors and the future profitability of our businesses.

 

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When performing our discounted cash flow analysis for each reporting unit, we incorporate the use of projected financial information and discount rates that are developed using market participant-based assumptions. The cash-flow projections are based on three-year financial forecasts developed by management that include revenue and expense projections, restructuring and strategic transformation activities, capital spending trends and investment in working capital to support anticipated revenue growth or other changes in the business. The selected discount rates consider the risk and nature of the respective reporting units’ cash flows and an appropriate capital structure and rates of return that market participants would require to invest their capital in our reporting units.

We believe our assumptions are appropriate and reflect our forecasted long-term business model, and give appropriate consideration to our historical results as well as the current economic environment and markets that we serve. The average discount rate applied to our projected cash flows was approximately 9.0%, which we considered reasonable based on the estimated capital costs of applicable market participants.

Our impairment assessment methodology includes the use of outside valuation experts and the inclusion of factors and assumptions related to third-party market participants. When performing our market approach for each reporting unit, we rely specifically on the guideline public company method. Our guideline public company method incorporates revenues and earnings multiples from publicly traded companies with operations and other characteristics similar to each reporting unit. The selected multiples consider each reporting unit’s relative growth, profitability, size and risk relative to the selected publicly traded companies.

After completing our annual impairment reviews for each reporting unit in the fourth quarter of 2015 and 2014, we concluded that goodwill was not impaired in either of these years. Although we experienced a decline in the fair values of our reporting units in 2015 as compared to 2014, with the exception of the Commercial Industries reporting unit, no reporting unit had an excess of fair value over carrying value of less than 20%.

The excess of reporting unit fair values over carrying values for our Commercial Industries reporting unit (which has approximately $1.9 billion of goodwill) was significantly less than in prior years with an excess of fair value over carrying value of approximately 17%. The decrease in fair values for this reporting unit was largely due to the mix of services and pricing pressures not being matched with cost reductions from productivity and restructuring actions. However, this reporting unit continues to operate in key areas of the business process services market, and the 2016 expectation is that through an increased focus on revenue and cost management, including expected benefits from our strategic transformation program, the business will reflect improved performance and a corresponding increase in fair value. We will continue to monitor the impact of economic, market and industry factors impacting this reporting unit in 2016.

Refer to Note 7—Goodwill and Intangible Assets, Net in the Combined Financial Statements for additional information regarding goodwill by reportable segment.

Restructuring and Asset Impairments

We have engaged in restructuring actions, which require management to estimate the timing and amount of severance and other employee separation costs for workforce reduction, the fair value of assets made redundant or obsolete and the fair value of lease cancellation and other exit costs. We accrue for severance and other employee separation costs under these actions when it is probable that benefits will be paid and the amount is reasonably estimable. The rates used in determining severance accruals are based on existing plans, historical experiences and negotiated settlements.

For a full description of our restructuring actions, refer to our discussions of restructuring in MD&A and in Note 8—Restructuring and Asset Impairment Charges in the Combined Financial Statements.

Income Taxes

Income tax expense and other income tax related information contained in the Combined Financial Statements are presented on a separate return basis as if the BPO Business filed its own tax returns. The BPO

 

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Business is subject to income taxes in the United States and numerous foreign jurisdictions. The determination of our provision for income taxes requires significant judgment, the use of estimates and the interpretation and application of complex tax laws. Our provision is based on nonrecurring events as well as recurring factors, including the taxation of foreign income. In addition, our provision will change based on discrete or other nonrecurring events such as audit settlements, tax law changes, changes in valuation allowances, etc., that may not be predictable. In the event that there is a significant unusual or one-time item recognized in our operating results, the taxes attributable to that item would be separately calculated and recorded at the same time as the unusual or one-time item.

We record the estimated future tax effects of temporary differences between the tax bases of assets and liabilities and amounts reported in our Combined Balance Sheets, as well as operating loss and tax credit carryforwards. We follow very specific and detailed guidelines in each tax jurisdiction regarding the recoverability of any tax assets recorded in our Combined Balance Sheets and provide valuation allowances as required. We regularly review our deferred tax assets for recoverability considering historical profitability, projected future taxable income, the expected timing of the reversals of existing temporary differences and tax planning strategies. Gross deferred tax assets of $414 million and $359 million had valuation allowances of $38 million and $35 million at December 31, 2015 and 2014, respectively.

We are subject to ongoing tax examinations and assessments in various jurisdictions. Accordingly, we may incur additional tax expense based upon our assessment of the more-likely-than-not outcomes of such matters. In addition, when applicable, we adjust the previously recorded tax expense to reflect examination results. Our ongoing assessments of the more-likely-than-not outcomes of the examinations and related tax positions require judgment and can materially increase or decrease our effective tax rate, as well as impact our operating results. Unrecognized tax benefits were $24 million, $32 million and $41 million at December 31, 2015, 2014 and 2013, respectively.

Refer to Note 14—Income and Other Taxes in the Combined Financial Statements for additional information regarding deferred income taxes and unrecognized tax benefits.

Loss Contingencies

The BPO Business is currently involved in various claims and legal proceedings. At least quarterly, we review the status of each significant matter and assess its potential financial exposure considering all available information including, but not limited to, the impact of negotiations, settlements, rulings, advice of legal counsel and other updated information and events pertaining to a particular matter. If the potential loss from any claim or legal proceeding is considered probable and the amount can be reasonably estimated, we accrue a liability for the estimated loss. Significant judgment is required in both the determination of probability and the determination as to whether an exposure is reasonably estimable. Because of uncertainties related to these matters, accruals are based only on the best information available at the time. As additional information becomes available, we reassess the potential liability related to its pending claims and litigation, and may revise its estimates. These revisions in the estimates of the potential liabilities could have a material impact on the BPO Business results of operations and financial position.

Refer to Note 15—Contingencies and Litigation in the Combined Financial Statements for additional information regarding loss contingencies.

RESULTS OF OPERATIONS

Basis of Presentation

The accompanying Combined and Condensed Combined Financial Statements included elsewhere in this Information Statement of the BPO Business have been derived from the Consolidated Financial Statements and accounting records of Xerox, as if the BPO Business operated on a standalone basis during the periods presented, and were prepared in accordance with U.S. GAAP and pursuant to the rules and regulations of the SEC.

 

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Historically, the BPO Business consisted of the Business Process Outsourcing operating segment within Xerox’s reportable Services segment and did not operate as a separate, standalone entity. Accordingly, Xerox has reported the financial position and the related results of operations, cash flows and changes in equity of the BPO Business in Xerox’s Consolidated Financial Statements.

As the separate legal entities that make up the BPO Business were not historically held by a single legal entity, Total Net Parent Equity is shown in lieu of shareholder’s equity in the accompanying Combined and Condensed Combined Financial Statements included elsewhere in this Information Statement. Balances between the BPO Business and Xerox that were not historically settled in cash are included in Net Parent Investment. Net Parent Investment represents Xerox’s interest in the recorded assets of the BPO Business and represents the cumulative investment by Xerox in the BPO Business through the dates presented, inclusive of operating results.

The accompanying Combined and Condensed Combined Financial Statements included elsewhere in this Information Statement include the historical basis of assets, liabilities, revenues and expenses of the individual businesses of Xerox’s historical BPO Business, including the joint ventures and partnerships over which the BPO Business has a controlling financial interest. The BPO Business uses the equity method to account for investments in business entities that it does not control if it is otherwise able to exercise significant influence over the entities operating and financial policies (generally 20% to 50% ownership). The accompanying Combined and Condensed Combined Financial Statements included elsewhere in this Information Statement include certain assets and liabilities that are held by Xerox that are specifically identifiable or otherwise attributable to the BPO Business. All intercompany transactions and balances within the BPO Business have been eliminated.

Cash is managed centrally through bank accounts controlled and maintained by Xerox. Accordingly, cash and cash equivalents held by Xerox at the corporate level were not attributable to the BPO Business for any of the periods presented. Only cash amounts specifically attributable to the BPO Business are reflected in the accompanying Combined and Condensed Combined Financial Statements included elsewhere in this Information Statement. Transfers of cash, both to and from Xerox’s centralized cash management system, are reflected as a component of Net Parent Investment in the accompanying Combined and Condensed Combined Balance Sheets and as a financing activity on the accompanying Combined and Condensed Combined Statements of Cash Flows. Historically, the BPO Business received or provided funding as part of Xerox’s centralized treasury program.

Third-party debt obligations of Xerox and the corresponding financing costs related to those debt obligations, specifically those that relate to senior notes, term loans, commercial paper obligations and revolving credit facilities, have not been attributed to the BPO Business, as the BPO Business was not the legal obligor on the debt. The only third-party debt obligations included in the Combined and Condensed Combined Financial Statements are those for which the legal obligor is a legal entity within the BPO Business.

During the periods presented, the BPO Business functioned as part of the larger group of companies controlled by Xerox. Accordingly, Xerox performed certain corporate overhead functions for the BPO Business. Therefore, certain corporate costs, including compensation costs for corporate employees supporting the BPO Business, have been allocated from Xerox. These allocated costs are for corporate functions including, but not limited to, senior management, legal, human resources, finance and accounting, treasury, information technology, marketing and communications, internal audit and other shared services, which are not provided at the business level. Where possible, these costs were allocated based on direct usage, with the remainder allocated on a basis of cost, headcount or other measures we have determined as reasonable. The Combined and Condensed Combined Financial Statements included elsewhere in this Information Statement do not necessarily include all the expenses that would have been incurred or held by the BPO Business had it been a separate, standalone company. We expect to incur additional expenses as well as gain incremental productivity as a separate, standalone publicly-traded company. It is not practicable to estimate actual costs that would have been incurred had the BPO Business been a separate, standalone company during the periods presented. Allocations for management costs and corporate support services provided to the BPO Business totaled $84 million and $87 million for the six months ended June 30, 2016 and 2015, respectively, and $170 million, $175 million and $173 million for the three years ended December 31, 2015, respectively.

 

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The management of the BPO Business believes the assumptions underlying the accompanying Combined and Condensed Combined Financial Statements included elsewhere in this Information Statement, including the assumptions regarding the allocated expenses, reasonably reflect the utilization of services provided to or the benefit received by the BPO Business during the periods presented. Nevertheless, the accompanying Combined and Condensed Combined Financial Statements included elsewhere in this Information Statement may not be indicative of the BPO Business’s future performance, do not necessarily include the actual expenses that would have been incurred by the BPO Business and may not reflect the results of operations, financial position and cash flows of the BPO Business had the BPO Business been a separate, standalone company during the periods presented.

The operations of the BPO Business are included in the consolidated U.S. federal, and certain state and local and foreign income tax returns filed by Xerox, where applicable. The BPO Business also files certain separate state and local and foreign income tax returns. Income tax expense and other income tax related information contained in the Combined and Condensed Combined Financial Statements are presented on a separate return basis as if the BPO Business filed its own tax returns. The income taxes of the BPO Business as presented in the Combined and Condensed Combined Financial Statements may not be indicative of the income taxes that the BPO Business will generate in the future. In jurisdictions where the BPO Business has been included in the tax returns filed by Xerox, any income taxes payable resulting from the related income tax provisions have been reflected in the balance sheet within “Net Parent Investment.”

For convenience and ease of reference, we refer to the financial statement caption “(Loss) Income before Income Taxes” as “pre-tax (loss) income” throughout the Combined and Condensed Combined Financial Statements included elsewhere in this Information Statement.

During the second quarter closing process, we determined that the first quarter 2016 income tax benefit of $25 million should have been $6 million higher. This additional income tax benefit was adjusted for and included in the six month results ended June 30, 2016. We will revise the first quarter 2016 financial statements in future filings. The Company concluded that this correction was not material to the condensed combined financial statements for the three months ended March 31, 2016.

Results of Operations—Six Months ended June 30, 2016 and 2015

Revenue Results Summary

Total Revenues

 

     Six Months Ended
June 30,
              

(in millions)

   2016      2015      % Change     CC
% Change
 

Total Revenues

   $ 3,298       $ 3,361         (2 )%      (1 )% 
  

 

 

    

 

 

      

 

CC – SeeNon-GAAP Financial Measures” section for description of constant currency.

Total revenues for the first half of 2016 decreased 2% compared to the first half of 2015, with a 1-percentage point negative impact from currency. Overall non-U.S. revenues represented approximately 20% of total revenues (Pound Sterling-denominated revenues represented approximately 2% of total revenues).

The decline was partially driven by our third quarter 2015 decision to not fully complete the HE platform implementations in California and Montana and the run-off of the Student Loan business, which combined had approximately a 1.0-percentage point impact. In addition, revenues decreased due to lower volumes and lost business, particularly in Commercial Industries, as well as overall price declines that were consistent with prior-period trends. Partially offsetting these declines were moderate growth from acquisitions and ramping of new contracts, primarily in some areas of Healthcare and Public Sector.

 

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Costs, Expenses and Other Income

Summary of Key Financial Ratios

The following is a summary of key financial ratios used to assess our performance:

 

     Six Months Ended June 30,  
         2016             2015             B/(W)      

Total Gross Margin

     15.7     15.1     0.6 pts.   

R&D as a % of Revenue

     0.5     0.8     0.3 pts.   

SAG as a % of Revenue

     10.7     10.5     (0.2) pts.   

Pre-tax Margin

     (2.7 )%      (5.7 )%      3.0 pts.   

Operating Margin(1)

     4.5     3.9     0.6 pts.   

 

(1) Refer to the Operating Income / Margin reconciliation table in the “Non-GAAP Financial Measures” section.

Pre-tax Margin

Pre-tax margin of (2.7)% increased 3.0-percentage points as compared to the six months ended June 30, 2015. The increase was primarily driven by the previously discussed $146 million pre-tax software impairment charge recorded in the second quarter of 2015 related to the change in strategy in our Government Healthcare business, as well as an improvement in gross margin due to reduced expenses in our HE platform implementations, favorable line-of-business mix and greater cost productivity.

Pre-tax margin includes the Amortization of intangible assets, Related party interest, net, Other expenses, net, Restructuring and related costs and Separation costs, all of which are separately discussed in subsequent sections. Operating margin excludes these items.

Operating Margin

Operating margin1 of 4.5% increased 0.6-percentage points as compared to the six months ended June 30, 2015. The increase was driven by an improvement in gross margin due to reduced costs in our HE platform implementations as well as more favorable line-of-business mix and greater cost productivity, including benefits from our strategic transformation program. As noted above, the BPO Business operating margin contains an allocation for management cost and corporate support services totaling $84 million and $87 million for the six months ended June 30, 2016 and 2015, respectively.

 

(1) Refer to the Operating Income / Margin reconciliation table in the “Non-GAAP Financial Measures” section.

Gross Margin

Gross margin of 15.7% increased 0.6-percentage points as compared to the six months ended June 30, 2015. The increase reflected restructuring and productivity improvements benefits from lower expenses associated with our HE platform implementations (a result of decisions we made in 2015 to curtail the Government HE Medicaid Platform business) and favorable line-of-business mix. These benefits were partially offset by continued margin pressures in our customer care service offerings, lower profitability in our Student Loan business and price declines.

Additional analysis of the change in gross margin for each business segment is included under “Operations Review of Segment Revenue and Profit” below.

 

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Research and Development Expenses (R&D)

 

     Six Months Ended
June 30,
        

(in millions)

   2016      2015      Change  

Total R&D Expenses

   $ 18       $ 27       $ (9

R&D as a percentage of revenue of 0.5% decreased 0.3-percentage points from the six months ended June 30, 2015. The decrease was primarily due to lower R&D program spending and the benefits from ongoing restructuring.

R&D of $18 million decreased by $9 million compared to the prior-year period.

Selling, Administrative and General Expenses (SAG)

SAG as a percentage of revenue of 10.7% increased by 0.2-percentage points from the six months ended June 30, 2015, as benefits from restructuring and cost initiatives only partially offset the decline in total revenues.

SAG of $353 million was $1 million higher than the six months ended June 30, 2015 and reflected the following:

 

    $1 million decrease in selling expenses; and

 

    $2 million increase in bad debt expense.

Restructuring and Related Costs

Restructuring and related costs of $49 million include restructuring and asset impairment charges of $45 million as well as $4 million of additional costs primarily related to professional support services associated with the implementation of the strategic transformation program.

During the first half of 2016, we recorded net restructuring and asset impairment charges of $45 million, which included approximately $48 million of severance costs related to headcount reductions of approximately 3,850 employees worldwide, $2 million of lease cancellation costs and $2 million in asset impairments. These costs were offset by $7 million of net reversals, primarily resulting from changes in estimated reserves from prior-period initiatives.

During the six months ended June 30, 2015, we recorded net restructuring and asset impairment charges of $151 million. Net restructuring charges of $5 million included $8 million of severance costs related to headcount reduction of approximately 460 employees worldwide and $1 million of lease cancellation costs, partially offset by $4 million of net reversals for changes in estimated reserves from prior period initiatives. Asset impairment charges of $146 million were associated with software asset impairments resulting from the change in strategy in our Government Healthcare business, discussed above.

The restructuring reserve balance as of June 30, 2016 for all programs was $27 million, all of which is expected to be spent over the next twelve months.

Refer to Note 6—Restructuring Programs in the Condensed Combined Financial Statements for additional information regarding our restructuring programs.

Worldwide Employment

Worldwide employment of approximately 93,000 as of June 30, 2016 decreased by 10,800 from December 31, 2015, due primarily to the impact of seasonal reductions as well as restructuring and productivity reductions, partially offset by additions from ramping new business.

 

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Amortization of Intangible Assets

Amortization of intangible assets of $137 million increased $12 million compared to the first half of 2015 primarily due to the impairment of a customer relationship asset in the first quarter of 2016 as a result of a lost contract.

Separation Costs

Separation costs are primarily for third-party investment banking, accounting, legal, consulting and other similar types of services related to the separation transaction as well as costs associated with the operational separation of the two companies, such as those related to human resources, brand management, real estate and information management to the extent not capitalized. Separation costs also include the costs associated with bonuses and restricted stock grants awarded to employees for retention through the separation.

During the first half of 2016, we recorded separation costs of $19 million, which excluded tax-related separation costs discussed below in Income Taxes.

Related-Party Interest Expense, Net

Related-party interest expense for the first half of 2016 of $20 million was $16 million lower than the prior year primarily due to the capitalization of certain related party notes payable in 2015 as a result of the proceeds received from the sale of the ITO business.

Refer to Note 12—Related Party Transactions and Parent Company Investment in the Condensed Combined Financial Statements for additional information regarding Related-party interest expense, net.

Other Expenses, Net

 

     Six Months Ended
June 30,
 

(in millions)

       2016              2015      

Third-party interest expense

   $ 2       $ 6   

Losses (gains) on sales of businesses and assets

     1         (1

Currency (gains) losses, net

     (2      2   

Litigation matters

     11         4   

Deferred compensation investment gains

     (3      (4

All other expenses, net

     2         3   
  

 

 

    

 

 

 

Total Other Expenses, Net

   $ 11       $ 10   
  

 

 

    

 

 

 

Third-Party Interest Expense: Third-party interest expense of $2 million was $4 million lower than the first half of 2015, driven by repayment of a $250 million senior note in the second quarter of 2015.

Litigation Matters: Litigation matters for the first half of 2016 reflect probable losses and reserves for various legal matters.

Income Taxes

The reported tax benefit for the first half of 2016 resulted in an effective tax rate of 62.5%. This rate was higher than the U.S. statutory tax rate primarily as a result of pre-tax losses in the United States due to the following charges: Restructuring and related costs, Amortization of intangible assets and Separation costs, including Tax-related separation costs, discussed below. The U.S. pre-tax losses are taxed at a higher rate than our foreign pre-tax income, which has the effect of increasing the overall effective tax rate above the statutory

 

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tax rate. The adjusted1 tax expense for the first half of 2016, which excludes the tax effects of the previously noted charges, resulted in an effective tax rate of 9.4%. This rate was lower than the U.S. statutory tax rate primarily due to the geographical mix of profits.

The reported tax benefit for the first half of 2015 resulted in an effective tax rate of 43.2%. This rate was higher than the U.S. statutory tax rate primarily as a result of pre-tax losses in the United States due to the following charges: Restructuring and related costs and Amortization of intangible assets. The U.S. pre-tax losses are taxed at a higher rate than our foreign pre-tax income, which has the effect of increasing the overall effective tax rate above the statutory tax rate. The adjusted1 tax expense for the first half of 2015, which excludes the tax effects of the previously noted charges, resulted in an effective tax rate of 27.4%, which was lower than the U.S. statutory tax rate primarily due to the geographical mix of profits.

 

  (1) Refer to the Effective Tax Rate reconciliation table in the “Non-GAAP Financial Measures” section.

Tax-related Separation Costs

We recorded a deferred tax benefit/asset of $7 million on our separation costs for the year-to-date period of 2016. We expect a portion of this deferred tax asset will be eliminated at the time the separation is executed, as certain separation costs will be non-deductible.

In connection with the Spin-Off, Xerox will undertake the Internal Transactions, which we expect to include internal reorganizations of, and transactions among, our wholly-owned subsidiaries and operating activities. Although we believe that, for the most part, the Internal Transactions can be completed in a tax-free manner, we do expect to incur incremental income tax expense associated with certain elements of the Internal Transactions. Accordingly, in second quarter 2016, we recorded $10 million for the estimated income tax on the book/tax basis differences currently associated with our investments in certain subsidiaries that are expected to be impacted by the Internal Transactions. Upon the completion of the Spin-Off, we also expect to recognize additional income tax expense in certain state and international jurisdictions primarily related to the change in realizability of certain deferred tax assets.

Net Loss from Continuing Operations

Net loss from continuing operations for the six months ended June 30, 2016 was $33 million. On an adjusted1 basis, net income from continuing operations was $106 million. Adjustments to net income include the Amortization of intangible assets, Restructuring and related costs and Separation costs.

Net loss from continuing operations for the six months ended June 30, 2015 was $109 million. On an adjusted1 basis, net income from continuing operations was $61 million. Adjustments to net income include the Amortization of intangible assets and Restructuring charges.

 

  (1) Refer to the “Non-GAAP Financial Measures” section for a reconciliation of reported net income from continuing operations to adjusted net income.

Discontinued Operations

There were no Discontinued Operations as of June 30, 2016.

Refer to Note 4—Divestitures in the Condensed Combined Financial Statements for additional information regarding Discontinued Operations.

Other Comprehensive Loss

Other comprehensive loss in the first half of 2016 was $13 million as compared to a loss of $17 million in the first half of 2015. The change of $4 million is primarily due to a $4 million change from the translation of our foreign currency denominated net assets.

 

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Both the first half of 2016 and the first half of 2015 reflect translation losses as a result of the weakening of our major foreign currencies as compared to the U.S. Dollar at quarter-end spot rates.

Operations Review of Segment Revenue and Profit

Our reportable segments correspond to how we organize and manage the business and are aligned to the industries in which our clients operate: Commercial Industries, Healthcare and Public Sector. Revenues by segment for the six months ended June 30, 2016 and 2015 were as follows:

 

     Six Months Ended June 30,  

(in millions)

   Total
Revenue
     % of Total
Revenue
    Segment
Profit (Loss)
     Segment
Margin
 

2016

          

Commercial Industries

   $ 1,366         41   $ 23         1.7

Healthcare

     880         27     74         8.4

Public Sector

     847         26     104         12.3

Other

     205         6     (53      (25.9 )% 
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 3,298         100   $ 148         4.5
  

 

 

    

 

 

   

 

 

    

 

 

 

2015

          

Commercial Industries

   $ 1,441         43   $ 37         2.6

Healthcare

     871         26     81         9.3

Public Sector

     854         25     94         11.0

Other

     195         6     (79      (40.5 )% 
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 3,361         100   $ 133         4.0
  

 

 

    

 

 

   

 

 

    

 

 

 

Commercial Industries Segment

Revenue

Commercial Industries revenue of $1,366 million was 41% of total revenues and decreased 5% from the first half of 2015. The decline was driven by lost business, due in part to actions we have taken to improve profitability in under-performing areas, a lower level of project work year-over-year as a result of fewer large cases in our litigation services offering, as well as negative impacts from currency. Partially offsetting the decline were benefits from ramping new contracts, primarily in our high-tech business area.

Segment Margin

Commercial Industries segment margin of 1.7% decreased 0.9-percentage points from the prior-year period primarily due to margin pressure in our customer care services offering and reduced project work in our litigation services offering. During the first half of 2016, margin improved sequentially from 1.0% in the first quarter of 2016 to 2.4% in the second quarter of 2016 as we focus on improving under-performing areas and gaining efficiencies from cost initiatives, including benefits from our strategic transformation program.

Commercial Industries has a higher proportion of multi-industry service offerings, particularly customer care that naturally has a lower margin, as opposed to higher-value, industry-specific service offerings. Accordingly, overall margins in this segment are expected to be below the margins of the Healthcare and Public Sector segments where industry-specific service offerings are more prominent. In addition, during 2015 we began to experience cost and productivity challenges in our customer care service offering which further pressured margins and which are being addressed by new customer care leadership.

 

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Healthcare Segment

Revenue

Healthcare revenue of $880 million was 27% of total revenues and increased 1% from the first half of 2015. Growth was driven by acquisitions and ramping new business with commercial payer, government healthcare and pharmaceutical clients. These areas of growth were partially offset by lost business and lower volumes in some areas.

Segment Margin

Healthcare segment margin of 8.4% decreased 0.9-percentage points from the prior year primarily due to margin pressures in customer care service offering partially offset by margin improvement in government healthcare. During the first half of 2016, margin improved sequentially from 8.0% in the first quarter to 8.9% in the second quarter reflecting increased efficiencies from cost actions.

Public Sector Segment

Revenue

Public Sector revenue of $847 million was 26% of total revenues and decreased 1% compared to the first half of 2015. Growth in transportation was offset by lower volumes and lost business in state government services.

Segment Margin

Public Sector segment margin of 12.3% increased 1.3-percentage points from the prior year as cost and productivity improvements and improved performance in transportation were partially offset by lost business in state government services. During the first half of 2016, margin improved sequentially from 10.4% in the first quarter to 14.1% in the second quarter reflecting gains in efficiencies from cost actions as well as progress ramping new business.

Other

Revenue

Other revenue of $205 million was 6% of total revenues and increased 5% from the first half of 2015. Growth was driven by the ramp of the New York HE platform implementation contract partially offset by our prior year decision not to complete the HE platform implementations in California and Montana and the run-off of the Student Loan business.

Other Loss

Other loss of $53 million improved $26 million from the prior-year period driven by improvements in HE platform implementation expenses resulting from the refocusing of our Government Healthcare business in 2015 and the decision to not fully complete the HE platform implementations in California and Montana, which more than offset lower profitability in the Student Loan business.

 

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Results of Operations—Years ended December 31, 2015, 2014 and 2013

Revenue Results Summary

Total Revenues

 

     Revenues      % Change     CC % Change  

(in millions)

   2015      2014      2013      2015     2014     2015     2014  

Total Revenues

   $ 6,662       $ 6,938       $ 6,879         (4 )%      1     (2 )%      1
  

 

 

    

 

 

    

 

 

          
                 
  

 

 

    

 

 

    

 

 

          

Adjusted Total Revenues(1)

   $ 6,778       $ 6,938       $ 6,879         (2 )%        —    
  

 

 

    

 

 

    

 

 

          

 

CC – See “Non-GAAP Financial Measures” section for description of constant currency.

 

(1) Refer to the Operating Income / Margin reconciliation table in the “Non-GAAP Financial Measures” section.

Total Revenues 2015

Total revenues for the year ended 2015 decreased 4% compared to the prior year with a 2-percentage point negative impact from currency. On an adjusted1 basis, excluding the HE charge, total revenues decreased 2%, with a 2-percentage point negative impact from currency. The negative impact from currency reflects the significant weakening of our major foreign currencies against the U.S. Dollar as compared to the prior year. Overall non-U.S. revenues represented 22% of total revenues.

The decline in total revenues was primarily driven by the run-off of the Student Loan business, the termination of the Texas Medicaid contract and the impact of our determination in the third quarter of 2015 to not fully complete the HE platform implementations in California and Montana, which combined had a 4.8-percentage point negative impact on revenue growth. Offsetting this decline was moderate acquisition contribution and organic growth in several lines of business net of the impacts from lost business and lower pricing that were consistent with prior trends.

Total Revenues 2014

Total revenues during 2014 increased 1% compared to the prior year with no impact from currency. Growth from acquisitions along with organic growth in certain areas of healthcare and litigation services as well as growth internationally were partially offset by declines in portions of customer care. In addition, the declines in the Student Loan business and the Texas Medicaid contract termination had a combined 2.7-percentage point negative impact on revenue growth.

An analysis of the change in revenue for each business segment is included under “Operations Review of Segment Revenue and Profit” below.

 

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Costs, Expenses and Other Income

Summary of Key Financial Ratios

The following is a summary of key financial ratios used to assess our performance:

 

     Year Ended December 31,      Change        
     2015     2014     2013     

2015 B/(W)

   

2014 B/(W)

    2015
Adjusted(1)
    2015
Adjusted(1)
B/(W) 2014
 

Total Gross Margin

     10.3     16.4     18.0      (6.1 ) pts      (1.6 ) pts      15.8     (0.6 ) pts 

R&D as a % of Revenue

     0.8     0.7     0.6      (0.1 ) pts      (0.1 ) pts      0.8     (0.1 ) pts 

SAG as a % of Revenue

     10.5     9.5     9.6      (1.0 ) pts      0.1  pts      10.3     (0.8 ) pts 

Pre-tax Margin

     (8.6 )%      0.1     3.0      (8.7 ) pts      (2.9 ) pts      N/A        N/A   

Operating Margin(1)

     NM        6.2     7.8      NM        (1.6 ) pts      4.8     (1.4 ) pts 

 

(1) Refer to Operating Income / Margin reconciliation table in the “Non-GAAP Financial Measures” section.

Pre-tax Margin

The pre-tax margin for the year ended December 31, 2015 of (8.6)% declined by 8.7-percentage points primarily due to the HE charge of $389 million, previously discussed, as well as higher Restructuring and asset impairment charges primarily as a result of the software impairment charge in our Government Healthcare business of $146 million. In addition, a 0.6-percentage point decrease in gross margin and a 0.8-percentage point increase in SAG as a percent of revenue reflecting targeted resource and other investments as well as higher costs associated with our HE platform implementations, prior to the implementation of the government healthcare strategy change noted above, also contributed to decline. These negative impacts were partially offset by restructuring savings and productivity improvements as well as lower related party interest expense and lower other expenses, net. The pre-tax margin for the year ended December 31, 2014 of 0.1% decreased 2.9 percentage points as compared to 2013. The decrease was primarily due to an $81 million increase in other expenses, net, as well as higher government healthcare platform expenses, reflecting the impairment associated with the loss of the Nevada Health Insurance Exchange (“HIX”) contract, resource investments across all segments and the run-off of the Student Loan business.

Pre-tax margin includes the amortization of intangible assets, restructuring and asset impairment charges, related party interest and other expenses, net, all of which are separately discussed in subsequent sections. Operating margin, discussed below, excludes these items.

Operating Margin

Operating margin1 for the year ended December 31, 2015 of 4.8% decreased 1.4-percentage points as compared to 2014. This decline was driven by a 0.6-percentage point decrease in gross margin and a 0.8-percentage point increase in SAG as a percent of revenue. The operating margin decline was driven by targeted resource and other investments as well as higher costs associated with our HE platform implementations, prior to the implementation of the change in strategy in our Government Healthcare business noted above. These negative impacts were partially offset by restructuring savings and productivity improvements. As noted above, the BPO Business operating margin contains an allocation for management cost and corporate support services totaling $170 million, $175 million and $173 million for the three years ended December 31, 2015, respectively.

Operating margin1 for the year ended December 31, 2014 of 6.2% decreased 1.6-percentage points as compared to 2013. The decrease was driven primarily by a 1.6-percentage point decline in gross margin. The

 

(1)  Refer to Operating Income / Margin reconciliation table and the Key Financial Ratios reconciliation table in the “Non-GAAP Financial Measures” section.

 

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operating margin decline reflected higher government healthcare platform expenses, including the impairment associated with the loss of the Nevada Health Insurance Exchange (“HIX”) contract, as well as resource investments across segments and the run-off of the Student Loan business.

Gross Margins

Gross margin for the year ended December 31, 2015 of 10.3% decreased 6.1-percentage points as compared to 2014. On an adjusted1 basis, gross margin of 15.8% decreased by 0.6-percentage points as compared to 2014. Targeted resource and other investments, impacts from unfavorable line-of-business mix, increased expenses associated with our HE platform implementations, prior to the change in strategy in our Government Healthcare business noted above, and price declines were partially offset by productivity improvements and restructuring benefits.

Gross margin for year ended December 31, 2014 of 16.4% decreased 1.6-percentage points as compared to 2013. The decrease was primarily due to higher expenses associated with our HE and HIX platforms and certain platforms in our Public Sector business, the run-off of our Student Loan business and price declines that were consistent with prior periods. These impacts were only partially offset by productivity improvements and restructuring benefits.

Additional analysis of the change in gross margin for each business segment is included under “Operations Review of Segment Revenue and Profit” below.

Research and Development Expenses (R&D)

 

     Year Ended December 31,      Change  

(in millions)

   2015      2014      2013      2015      2014  

Total R&D Expenses

   $ 52       $ 46       $ 40       $ 6       $ 6   

R&D as a percent of revenue for the year ended December 31, 2015 of 0.8% increased 0.1-percentage points on an actual and adjusted1 basis, and R&D of $52 million for the year ended December 31, 2015 was $6 million higher than 2014, both driven by investments in new offerings and capabilities.

R&D as a percent of revenue for the year ended December 31, 2014 of 0.7% increased 0.1-percentage points, and R&D of $46 million for the year ended December 31, 2014 was $6 million higher than 2013, both driven by investments in new offerings and capabilities.

 

 

(1) See the “Non-GAAP Financial Measures” section for an explanation of this non-GAAP financial measure.

Selling, Administrative and General Expenses (SAG)

SAG as a percent of revenue of 10.5% increased 1.0-percentage point for the year ended December 31, 2015 as compared to 2014. On an adjusted1 basis, SAG as a percentage of revenue of 10.3% increased 0.8-percentage points from 2014. The increase was driven by revenue declines and targeted resource and other investments partially offset by productivity improvement.

SAG expenses of $699 million for the year ended December 31, 2015 were $40 million higher than the prior-year period. The increase in SAG expense reflected the following:

 

    $14 million increase in selling expenses; and

 

    $26 million increase in general and administrative expenses.

 

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SAG as a percent of revenue of 9.5% decreased 0.1-percentage point for the year ended December 31, 2014 as compared to 2013. The decrease was driven by an increase in revenue combined with lower SAG expenses reflecting productivity improvements.

SAG expenses of $659 million for the year ended December 31, 2014 were $2 million lower than the prior-year period. The decrease in SAG expense reflects the following:

 

    $18 million decrease in selling expenses;

 

    $14 million increase in general and administrative expenses; and

 

    $2 million increase in bad debt expense.

 

 

(1) See the “Non-GAAP Financial Measures” section for an explanation of this non-GAAP financial measure.

Restructuring and Asset Impairment Charges

During the year ended December 31, 2015, we recorded net restructuring and asset impairment charges of $159 million and included the following:

 

    $20 million of severance costs related to headcount reductions of approximately 1,000 employees globally. The actions impacted several functional areas and focused on gross margin improvements;

 

    $1 million for lease termination costs, primarily reflecting continued optimization of our worldwide operating locations; and

 

    $146 million of asset impairment charges associated with software asset impairments resulting from the change in strategy in our Government Healthcare business in the second quarter of 2015.

The above charges were partially offset by $8 million of net reversals for changes in estimated reserves from prior period initiatives.

We expect 2016 year-over-year pre-tax savings of approximately $20 million from our 2015 restructuring actions.

During the year ended December 31, 2014, we recorded net restructuring and asset impairment charges of $21 million and included the following:

 

    $28 million of severance costs related to headcount reductions of approximately 2,600 employees globally. The actions impacted several functional areas and were focused on gross margin improvements;

 

    $2 million for lease termination costs primarily reflecting continued optimization of our worldwide operating locations; and

 

    $2 million of asset impairment charges.

The above charges were partially offset by $11 million of net reversals for changes in estimated reserves from prior period initiatives.

Restructuring Summary

The restructuring reserve balance as of December 31, 2015 for all programs was $4 million, all of which is expected to be spent over the next twelve months.

Refer to Note 8—Restructuring and Asset Impairment Charges in the Combined Financial Statements for additional information regarding our restructuring programs.

 

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Worldwide Employment

Worldwide employment of approximately 103,800 as of December 31, 2015 increased by approximately 6,600 from December 31, 2014, due primarily to the impact of ramping new business and acquisitions partially offset by restructuring reductions and productivity improvements. Worldwide employment was approximately 97,200 and 91,600 as of December 31, 2014 and 2013, respectively (note that prior year employment amounts are adjusted to exclude employees associated with the divested ITO business).

Amortization of Intangible Assets

During the year ended December 31, 2015, we recorded $250 million of expense related to the amortization of intangible assets, which was flat from the prior year.

During the year ended December 31, 2014, we recorded $250 million of expense related to the amortization of intangible assets, which was $10 million higher than the prior year reflecting the increase in acquisitions in 2014.

Refer to Note 7—Goodwill and Intangible Assets, Net in the Combined Financial Statements for additional information regarding our intangible assets.

Related-Party Interest Expense, Net

Related-party interest expense for the year ended December 31, 2015 of $61 million was $46 million lower than the prior year due to the capitalization of certain related party notes payable in 2015 as a result of the proceeds received from the sale of the ITO business.

Refer to Note 18—Related Party Transactions and Parent Company Investment in the Combined Financial Statements for additional information regarding Related-party interest expense, net.

Other Expenses, Net

 

     Year Ended December 31,  

(in millions)

   2015      2014      2013  

Third-party interest expense

     8         11         8   

Gains on sales of businesses and assets(1)

     (1      (1      (23

Currency losses (gains), net

     4         (1      (3

Litigation matters

     18         38         —     

Deferred compensation investment losses (gains)

     1         (7      (15

All other expenses, net

     8         5         (3
  

 

 

    

 

 

    

 

 

 

Total Other Expenses, Net

   $ 38       $ 45       $ (36
  

 

 

    

 

 

    

 

 

 

 

(1) Excludes the loss on sale of the ITO business reported in Discontinued Operations. Refer to Note 4—Divestitures in the Combined Financial Statements for additional information.

Third-Party Interest Expense: Represents interest on senior notes and capital lease obligations.

Refer to Note 10—Debt in the Combined Financial Statements for additional information regarding third-party interest expense.

Gains on Sales of Businesses and Assets: The 2013 gain on sale of businesses and assets was primarily related to the sale of a portion of our Dallas facility.

 

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Currency Losses (Gains), Net: Currency losses (gains) primarily result from the re-measurement of foreign currency-denominated assets and liabilities, the cost of hedging foreign currency-denominated assets and liabilities and the mark-to-market of foreign exchange contracts utilized to hedge those foreign currency-denominated assets and liabilities.

Litigation Matters: Litigation matters in 2015 and 2014 reflect probable losses and reserves for various legal matters.

Refer to Note 15—Contingencies and Litigation, in the Combined Financial Statements for additional information regarding litigation against the Company.

Deferred Compensation Investment Losses (Gains): Represents losses (gains) on investments supporting certain of our deferred compensation arrangements. These gains or losses are offset by an increase or decrease in compensation expense recorded in SAG as a result of the increase or decrease in the liability associated with these arrangements, respectively.

Income Taxes

The 2015 effective tax rate was 41.5% which includes the discrete tax benefit associated with the HE charge in the third quarter of 2015 and the software impairment charge in the second quarter of 2015. On an adjusted1 basis, the 2015 effective tax rate was 32.2%, which was lower than the U.S. statutory tax rate primarily due to the retroactive impact of the Protecting Americans from Tax Hikes Act of 2015 and the redetermination of certain unrecognized tax positions partially offset by the geographical mix of profits.

The 2014 effective tax rate was (240.0)% primarily due to the tax impact of certain discrete benefits as well as the low level of pre-tax income after the amortization of intangibles. On an adjusted1 basis, the 2014 effective tax rate was 28.1%, which was lower than the U.S. statutory tax rate primarily due to the redetermination of certain unrecognized tax positions and the retroactive impact from the U.S. Tax Increase Prevention Act of 2014.

The 2013 effective tax rate was 34.8%, or 36.9% on an adjusted1 basis. The adjusted tax rate for 2013 was higher than the U.S. statutory tax rate primarily due to the geographical mix of profits, partially offset by the retroactive tax benefits from the American Taxpayer Relief Act of 2012 tax law change and the redetermination of certain unrecognized tax positions.

 

(1) See the “Non-GAAP Financial Measures” section for an explanation of the adjusted effective tax rate non-GAAP financial measure.

Net (Loss) Income From Continuing Operations

Net loss from continuing operations for the year ended December 31, 2015 was $336 million. On an adjusted1 basis, net income was $143 million, reflecting the adjustments for the amortization of intangible assets as well as the software impairment charge and the HE charge.

Net income from continuing operations for the year ended December 31, 2014 was $34 million. On an adjusted1 basis, net income was $187 million and included adjustments for the amortization of intangible assets.

Net income from continuing operations for the year ended December 31, 2013 was $135 million. On an adjusted1 basis, net income was $282 million and included adjustments for the amortization of intangible assets.

 

(1) See the “Non-GAAP Financial Measures” section for a reconciliation of reported net income from continuing operations to adjusted net income.

 

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Discontinued Operations

Discontinued Operations are primarily related to our sale of the ITO business. In the fourth quarter of 2014, we announced an agreement to sell the ITO business to Atos SE and began reporting it as a Discontinued Operation. The sale was completed on June 30, 2015.

Refer to Note 4—Divestitures in the Combined Financial Statements for additional information regarding Discontinued Operations.

Other Comprehensive Loss

Other comprehensive loss was $52 million in 2015 as compared to a loss of $71 million in 2014. The reduction in the loss of $19 million was primarily due to net gains from changes in defined benefit plans of $7 million in 2015 as compared to losses of $25 million in 2014. This change is largely due to an increase in discount rates in 2015 versus a decrease in discount rates in 2014 and the corresponding impact on our defined benefit obligation (decrease in 2015 versus an increase in 2014). The improvement in defined benefit plans was offset by increased losses from translation adjustments of $16 million in 2015. Translation losses in both 2015 and 2014 reflect the weakening of our major foreign currencies as compared to the U.S. Dollar.

Other comprehensive loss was $71 million in 2014 as compared to a loss of $27 million in 2013. The increase in the loss of $44 million was primarily due to losses in our defined benefit plans due to a decrease in discount rates and the corresponding increase in our defined benefit obligation. In addition, losses from translation adjustments increased $15 million a result of the increased weakening of our major foreign currencies as compared to the U.S. Dollar in 2014.

Refer Note 13—Employee Benefit Plans in the Combined Financial Statements for additional information regarding changes in defined benefit plans.

Recent Accounting Pronouncements

Refer to Note 1—Basis of Presentation and Summary of Significant Accounting Policies in the Combined Financial Statements for a description of recent accounting pronouncements including the respective dates of adoption and the effects on results of operations and financial condition.

 

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Operations Review of Segment Revenue and Profit

Our reportable segments correspond to how we organize and manage the business and are aligned to the industries in which our clients operate: Commercial Industries, Healthcare and Public Sector. Revenues by segment for the three years ended December 31, 2015 were as follows:

 

(in millions)

   Total Revenue      % of Total Revenue     Segment Profit (Loss)      Segment Margin  

2015

          

Commercial Industries

   $ 2,896         44   $ 69         2.4

Healthcare

     1,750         26     157         9.0

Public Sector

     1,727         26     200         11.6

Other

     289         4     (489      *   
  

 

 

    

 

 

   

 

 

    

Total

   $ 6,662         100   $ (63      (0.9 )% 
  

 

 

    

 

 

   

 

 

    

Adjusted:(1)

          

Other

   $ 405         6   $ (100      (24.7 )% 

Total

     6,778         100     326         4.8

2014

          

Commercial Industries

   $ 2,953         43   $ 152         5.1

Healthcare

     1,743         25     138         7.9

Public Sector

     1,767         25     206         11.7

Other

     475         7     (49      (10.3 )% 
  

 

 

    

 

 

   

 

 

    

Total

   $ 6,938         100   $ 447         6.4
  

 

 

    

 

 

   

 

 

    

2013

          

Commercial Industries

   $ 2,871         42   $ 168         5.9

Healthcare

     1,709         25     122         7.1

Public Sector

     1,780         26     225         12.6

Other

     519         7     23         4.4
  

 

 

    

 

 

   

 

 

    

Total

   $ 6,879         100   $ 538         7.8
  

 

 

    

 

 

   

 

 

    

 

* Percentage not meaningful
(1) Refer to the Other Segment Revenue / Margin and Operating Income / Margin reconciliations table in the “Non-GAAP Financial Measures” section.

Commercial Industries Segment

Revenue 2015

Commercial Industries revenue of $2,896 million was 44% of total revenues and decreased 2% from 2014. The year-over-year decline was driven by the negative impacts from currency and price declines. The decline was partially offset by revenues from acquisitions as well as increased project-related work in our litigation services offering. In addition, within our customer care services offering, lost business was offset by ramping new contracts.

Segment Margin 2015

Commercial Industries segment margin of 2.4% decreased by 2.7-percentage points from the prior year primarily due to margin pressure in our customer care offering, investments in sales and managerial resources to improve our operating performance over time, as well as the impacts of price declines.

Revenue 2014

Commercial Industries revenue of $2,953 million increased 3% from 2013. The revenue increase was driven by customer care growth, particularly in high tech and industrial, retail and hospitality businesses and by project-related growth in our litigation services offering.

 

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Segment Margin 2014

Commercial Industries segment margin of 5.1% decreased by 0.8-percentage points from the prior year primarily due to investments in customer care, particularly in recruiting and platforms, and an increase in lower-margin litigation services projects.

Healthcare Segment

Revenue 2015

Healthcare revenue of $1,750 million was 26% of total revenues and remained flat from the prior year with a negligible impact from currency. Moderate acquisition contribution and organic growth in commercial payers offset the impacts from the loss of the Texas Medicaid contract and lower project-related work in commercial providers.

Segment Margin 2015

Healthcare segment margin of 9.0% increased 1.1-percentage points from the prior year as improvements in government healthcare, including the prior year Nevada HIX impairment, more than offset margin declines on the commercial side driven in part by line of business mix and investments.

Revenue 2014

Healthcare revenue of $1,743 million increased 2% from 2013, with negligible impact from currency. The increase was primarily driven by growth in commercial payers and providers partially offset by the loss of the Texas Medicaid contract in government healthcare.

Segment Margin 2014

Healthcare segment margin of 7.9% increased 0.8-percentage points from the prior year primarily due to productivity and restructuring benefits partially offset by the Nevada HIX impairment.

Public Sector Segment

Revenue 2015

Public Sector revenue of $1,727 million was 26% of total revenues and decreased 2% from 2014. Negative impacts from currency and declines in federal services more than offset growth in state and transportation services.

Segment Margin 2015

Public Sector segment margin of 11.6% decreased 0.1-percentage point from the prior year as improvements in federal and state services were more than offset by modest declines in transportation services.

Revenue 2014

Public Sector revenue of $1,767 million decreased 1% from 2013. The decline was primarily driven by our public transit offerings in transportation services and local government.

Segment Margin 2014

Public Sector segment margin of 11.7% decreased by 0.9-percentage points from the prior year primarily due to higher costs and investments related to the development of a public transit fare collection platform.

 

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Other

Revenue 2015

Other revenue of $289 million decreased 39% from 2014, with no impact from currency. On an adjusted1 basis, Other revenue of $405 million was 6% of total revenue and decreased 15% compared to 2014. The decline was primarily driven by the Student Loan business run-off and the impact of our determination in the third quarter of 2015 to not fully complete the HE platform implementations in California and Montana.

Other Loss 2015

Other loss of $489 million increased $440 million from the prior year. On an adjusted1 basis, Other loss of $100 million increased $51 million from the prior year primarily due to higher losses in our HE platform implementations, prior to the refocusing of our Government Healthcare business, and lower profit from the declining Student Loan business.

Revenue 2014

Other revenue of $475 million decreased 8% from 2013, with no impact from currency, due primarily to education services, including the exit from the federal Student Loan business and run-off of the commercial Student Loan business.

Other Loss 2014

Other profit declined by $72 million from the prior year to a loss of $49 million driven primarily by increased expenses in our HE platform implementations.

Metrics

Signings

Signings are defined as estimated future revenues from contracts signed during the period, including renewals of existing contracts. Total Contract Value (“TCV”) is the estimated total contractual revenue related to signed contracts.

Six Months ended June 30, 2016

Signings in the first half of 2016 were as follows:

 

(in billions)

   Six Months Ended
June 30, 2016
 

Total Signings

   $ 3.7   
  

 

 

 

Signings were an estimated $3.7 billion in TCV and declined 10% from the prior-year period, primarily reflecting lower contribution from new business and the prior year large New York Medicaid Information System new business signing. On a trailing twelve-month (TTM) basis, signings increased 4% versus the comparable prior-year period.

Years ended December 31, 2015, 2014 and 2013

Signings in the years ended December 31, 2015, 2014 and 2013 were as follows:

 

     Year Ended December 31,  

(in billions)

   2015      2014      2013  

Total Signings

   $ 8.4       $ 7.6       $ 8.9   
  

 

 

    

 

 

    

 

 

 

 

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Signings were an estimated $8.4 billion in TCV for 2015 and increased 10% as compared to the prior year. Growth in 2015 included a 37% increase in new business TCV, which is inclusive of larger contracts such as the Florida Tolling and New York Medicaid Management Information System, and was partially offset by lower renewal decision opportunities.

Signings were an estimated $7.6 billion in TCV for 2014 and decreased 14% compared to the prior year. The decrease was driven primarily by a 25% decrease in new business TCV and a modestly lower level of renewal decision opportunities.

Renewal Rate

Renewal rate is defined as the annual recurring revenue (“ARR”) on contracts that are renewed during the period as a percentage of ARR on all contracts for which a renewal decision was made during the period. Our renewal rate in the first half of 2016 of 85% was at the low end of our target range of 85%–90%.

Signings and renewal rate reflect, in part, our decision not to pursue opportunities with lower margin and return profiles.

CAPITAL RESOURCES AND LIQUIDITY

As of June 30, 2016 and December 31, 2015, total cash and cash equivalents were $160 million and $140 million, respectively.

Cash Flow Analysis–Six Months ended June 30, 2016 and 2015

The following summarizes our cash flows for the six months ended June 30, 2016 and 2015, as reported in our Condensed Combined Statement of Cash Flows in the accompanying Condensed Combined Financial Statements:

 

     Six Months Ended
June 30,
     Change  

(in millions)

       2016              2015         

Net cash used in operating activities

   $ (178    $ (123    $ (55

Net cash (used in) provided by investing activities

     (128      773         (901

Net cash provided by (used in) financing activities

     326         (639      965   

Effect of exchange rate changes on cash and cash equivalents

     —           (4      4   
  

 

 

    

 

 

    

 

 

 

Increase in cash and cash equivalents

     20         7         13   

Cash and cash equivalents at beginning of period

     140         159         (19
  

 

 

    

 

 

    

 

 

 

Cash and Cash Equivalents at End of Period

   $ 160       $ 166       $ (6
  

 

 

    

 

 

    

 

 

 

Cash Flows from Operating Activities

Net cash used in operating activities was $178 million for the six months ended June 30, 2016. The $55 million decrease in operating cash from the prior-year period was primarily due to the following:

 

    $12 million increase in pre-tax income before depreciation and amortization, restructuring and related charges, gains on sales of businesses and assets, litigation and separation-related costs.

 

    $76 million decrease reflecting settlement payments associated with our third quarter 2015 determination that we would not fully complete the HE implementations in California and Montana.

 

    $41 million decrease from accounts payable and accrued compensation primarily due to the timing of payments.

 

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    $39 million decrease due to the prior year source of cash in the discontinued ITO business.

 

    $28 million decrease from accounts receivable primarily due to the timing of collections.

 

    $11 million decrease due to payments for separation-related costs.

 

    $10 million decrease from higher restructuring payments as a result of increased restructuring initiatives in 2016.

 

    $65 million increase from lower net income tax payments due to refunds of prior year overpayments.

 

    $16 million increase primarily from lower spending for product software from the refocusing of our Government Healthcare business in 2015.

Cash Flows from Investing Activities

Net cash used in investing activities was $128 million for the six months ended June 30, 2016. The $901 million decrease in cash from the prior-year period was primarily due to the following:

 

    $986 million decrease in proceeds from sales of businesses. First half 2016 included a $52 million payment to Atos for final post-closing adjustments associated with the 2015 ITO divestiture. First half 2015 included $930 million of net proceeds from the sale of the ITO business.

 

    $44 million increase due to lower capital expenditures (including internal use software) primarily due to the sale of the ITO business to Atos.

 

    $42 million increase from lower acquisition spending.

Cash Flows from Financing Activities

Net cash provided by financing activities was $326 million for the six months ended June 30, 2016. The $965 million increase in cash from the prior-year period was primarily due to the following:

 

    $721 million increase due to net transfers from parent.

 

    $244 million increase from net debt activity primarily due to a payment of $250 million on Senior Notes in 2015.

Cash Flow Analysis—Years ended December 31, 2015, 2014 and 2013

The following summarizes our cash flows for the three years ended December 31, 2015, as reported in our Combined Statements of Cash Flows in the accompanying Combined Financial Statements:

 

     Year Ended December 31,     Change  

(in millions)

   2015     2014     2013     2015     2014  

Net cash provided by operating activities

   $ 493      $ 665      $ 379      $ (172   $ 286   

Net cash provided by (used in) investing activities

     514        (547     (300     1,061        (247

Net cash used in financing activities

     (1,015     (90     (66     (925     (24

Effect of exchange rate changes on cash and cash equivalents

     (11     (8     (1     (3     (7
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Decrease) increase in cash and cash equivalents

     (19     20        12        (39     8   

Cash and cash equivalents at beginning of year

     159        139        127        20        12   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and Cash Equivalents at End of Year

   $ 140      $ 159      $ 139      $ (19   $ 20   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash Flows from Operating Activities

Net cash provided by operating activities was $493 million for the year ended December 31, 2015. The $172 million decrease in operating cash from 2014 was primarily due to the following:

 

    $149 million decrease in pre-tax income before depreciation and amortization, gain on sales of businesses and assets, restructuring charges and litigation as well as the HE charge.

 

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    $128 million decrease from higher income tax payments primarily driven by the tax on the sale of the ITO business.

 

    $105 million decrease due to the loss of cash flow associated with the ITO business, post-divestiture.

 

    $167 million increase from accounts receivable primarily due to additional sales of accounts receivable under existing programs, select use of prompt pay discounts and lower revenues.

 

    $36 million increase from lower spending for product software and up-front costs for outsourcing service contracts.

 

    $22 million increase in accounts payable and accrued compensation primarily related to the timing of accounts payable.

Cash flow from operations in 2015 and 2014 include approximately $40 million and $145 million, respectively, of cash flows from our ITO business, which was held for sale and reported as a Discontinued Operation through its sale on June 30, 2015. Refer to Note 4—Divestitures in the Combined Financial Statements for additional information.

Net cash provided by operating activities was $665 million for the year ended December 31, 2014. The $286 million increase in operating cash from 2013 was primarily due to the following:

 

    $159 million increase from accounts receivable primarily due to the timing of collections and improved collections.

 

    $141 million increase due to accounts payable and accrued compensation primarily related to the timing of accounts payable payments and improved payment terms with key suppliers.

 

    $55 million increase due to lower net income tax payments primarily due to lower U.S. pre-tax income.

 

    $39 million increase from lower spending for product software and up-front costs for outsourcing service contracts.

 

    $15 million increase due to the increased cash flow from the ITO business.

 

    $77 million decrease in pre-tax income before depreciation and amortization, gain on sales of businesses and assets and litigation.

Cash flow from operations in 2014 and 2013 include approximately $145 million and $130 million, respectively, of cash flows from our ITO business, which was held for sale and was reported as a Discontinued Operation through its sale on June 30, 2015. Refer to Note 4—Divestitures in the Combined Financial Statements for additional information.

Cash Flows from Investing Activities

Net cash provided by investing activities was $514 million for the year ended December 31, 2015. The $1,061 million increase in cash from 2014 was primarily due to the following:

 

    $936 million of net proceeds from the sale of the ITO business. Refer to Note 4—Divestitures in the Combined Financial Statements for additional information.

 

    $109 million change from acquisitions. 2015 acquisitions include RSA Medical LLC for $141 million, Intellinex LLC for $28 million, inVentiv Patient Access Solutions for $15 million and Healthy Communities Institute Corporation for $13 million. 2014 acquisitions include ISG Holdings, Inc. for $225 million, Invoco Holding GmbH for $54 million and Consilience Software, Inc. for $25 million.

 

    $82 million change due to lower capital expenditures (including internal use software), primarily due to the sale of the ITO business.

 

    $59 million change due to higher net payments on related party notes receivable.

Capital expenditures (including internal use software) in 2015 and 2014 include approximately $40 million and $100 million, respectively, of our ITO business, which was held for sale and reported as a Discontinued

 

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Operation through June 30, 2015. Refer to Note 4—Divestitures in the Combined Financial Statements for additional information.

Net cash used in investing activities was $547 million for the year ended December 31, 2014. The $247 million decrease in cash from 2013 was primarily due to the following:

 

    $275 million increase in acquisitions. 2014 acquisitions include ISG Holdings, Inc. for $225 million, Invoco Holding GmbH for $54 million and Consilience Software, Inc. for $25 million. 2013 acquisitions include LearnSomething, Inc. for $13 million and CPAS Systems, Inc. for $12 million.

 

    $15 million of net proceeds from the sale of the Truckload Management Services, Inc. business. Refer to Note 4—Divestitures, in the Combined Financial Statements for additional information.

 

    $42 million increase due to lower net payments on related party notes receivable.

 

    $12 million increase due to lower capital expenditures (including internal use software).

 

    $39 million decrease primarily due to lower proceeds from the sale of assets. 2013 includes proceeds from the sale of a U.S. facility of $38 million.

Capital expenditures (including internal use software) in 2014 and 2013 include approximately $100 million in each year associated with our ITO business, which was held for sale and reported as a Discontinued Operation through its sale on June 30, 2015. Refer to Note 4—Divestitures in the Combined Financial Statements for additional information.

Cash Flows from Financing Activities

Net cash used in financing activities was $1,015 million for the year ended December 31, 2015. The $925 million decrease in cash from 2014 was primarily due to the following:

 

    $636 million decrease due to net transfers from parent.

 

    $293 million decrease from net debt activity. 2015 reflects payment of $250 million on Senior Notes and net payments of $7 million on capital leases. 2014 reflects net proceeds of $40 million on capital leases offset by net payments of $4 million on other debt.

 

    $9 million increase from contingent consideration payments for certain acquisitions in 2014.

Net cash used in financing activities was $90 million for the year ended December 31, 2014. The $24 million decrease in cash from 2013 was primarily due to the following:

 

    $25 million decrease due to net transfers from parent.

 

    $9 million decrease from contingent consideration payments for certain acquisitions in 2014.

 

    $10 million increase from net debt activity. 2014 reflects net proceeds of $40 million on capital leases offset by net payments of $4 million on other debt. 2013 reflects net proceeds of $21 million on capital leases and $5 million on other debt.

Sales of Accounts Receivable

Accounts receivable sales arrangements are utilized in the normal course of business as part of our cash and liquidity management. We have financial facilities in the United States, Canada and several countries in Europe that enable us to sell certain accounts receivables without recourse to third parties. The accounts receivables sold are generally short-term trade receivables with payment due dates of less than 60 days. During 2015 operating cash flows benefited by $58 million from sales of accounts receivable. This level of receivable sales and benefits may not be indicative of what we expect going forward as we evaluate our working capital needs.

 

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Refer to Note 5—Accounts Receivable, Net in the Combined Financial Statements for additional information.

Financial Instruments

Refer to Note 11—Financial Instruments in the Combined Financial Statements for additional information.

Contractual Cash Obligations and Other Commercial Commitments and Contingencies

At December 31, 2015, we had the following contractual cash obligations and other commercial commitments and contingencies:

 

(in millions)

   2016      2017      2018      2019      2020      Thereafter  

Total debt, including capital lease obligations(1)

   $ 24       $ 20       $ 12       $ 5       $ —         $ —     

Related party notes payable(2)

     1,132         —           —           —           —           —     

Minimum operating lease commitments(3)

     238         171         107         71         43         67   

Defined benefit pension plans

     6         —           —           —           —           —     

Estimated Purchase Commitments(4)

     134         112         99         100         59         123   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,534       $ 303       $ 218       $ 176       $ 102       $ 190   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Total debt excludes interest, as amounts are immaterial. Refer to Note 10—Debt in the Combined Financial Statements for additional information regarding debt and interest on debt.
(2) Refer to Note 18—Related Party Transactions and Parent Company Investment for additional information. These notes are expected to be settled in advance of the Spin-Off as part of the initial capitalization of the Company.
(3) Refer to Note 6—Land, Buildings, Equipment and Software, Net in the Combined Financial Statements for additional information related to minimum operating lease commitments.
(4) Other purchase commitments: We enter into other purchase commitments with vendors in the ordinary course of business. Our policy with respect to all purchase commitments is to record losses, if any, when they are probable and reasonably estimable. We currently do not have, nor do we anticipate, material loss contracts.

Pension Benefit Plans

We sponsor defined benefit pension plans that require periodic cash contributions. Our 2015 cash contributions for these plans were $8 million. In 2016, based on current actuarial calculations, we expect to make contributions of approximately $6 million to our worldwide defined benefit pension plans.

Contributions to our defined benefit pension plans in subsequent years will depend on a number of factors, including the investment performance of plan assets and discount rates as well as potential legislative and plan changes. At December 31, 2015, the unfunded and underfunded balances of our U.S. and Non-U.S. defined benefit pension plans were $27 million and $7 million, respectively, or $34 million in the aggregate.

Refer to Note 13—Employee Benefit Plans in the Combined Financial Statements for additional information regarding contributions to our defined benefit pension and post-retirement plans.

Other Contingencies and Commitments

As more fully discussed in Note 15—Contingencies and Litigation in the Combined Financial Statements, we are involved in a variety of claims, lawsuits, investigations and proceedings concerning securities law; governmental entity contracting, servicing and procurement law; intellectual property law; environmental law; employment law; the Employee Retirement Income Security Act of 1974 (ERISA); and other laws and regulations. In addition, guarantees, indemnifications and claims may arise during the ordinary course of business from relationships with suppliers, customers and non-consolidated affiliates. Nonperformance under a contract, including a guarantee, indemnification or claim, could trigger an obligation of the Company.

 

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We determine whether an estimated loss from a contingency should be accrued by assessing whether a loss is deemed probable and can be reasonably estimated. Should developments in any of these areas cause a change in our determination as to an unfavorable outcome and result in the need to recognize a material accrual, or should any of these matters result in a final adverse judgment or be settled for significant amounts, they could have a material adverse effect on our results of operations, cash flows and financial position in the period or periods in which such change in determination, judgment or settlement occurs.

Off-Balance Sheet Arrangements

We may occasionally utilize off-balance sheet arrangements in our operations (as defined by the SEC Financial Reporting Release 67 (FRR-67), “Disclosure in Management’s Discussion and Analysis about Off-Balance Sheet Arrangements and Aggregate Contractual Obligations”). We enter into the following arrangements that have off-balance sheet elements:

 

    Operating leases in the normal course of business. The nature of these lease arrangements is discussed in Note 6—Land, Buildings, Equipment and Software, Net in the Combined Financial Statements.

 

    We have facilities, primarily in the United States and several countries in Europe, that enable us to sell to third-parties certain accounts receivable without recourse. In most instances, a portion of the sales proceeds are held back by the purchaser and payment is deferred until collection of the related sold receivables. Refer to Note 5—Accounts Receivables, Net in the Combined Financial Statements for further information regarding these facilities.

As of December 31, 2015, we do not believe we have any off-balance sheet arrangements that have, or are reasonably likely to have, a material current or future effect on financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

In addition, see the preceding table for the contractual cash obligations and other commercial commitments of the BPO Business and Note 15—Contingencies and Litigation in the Combined Financial Statements for additional information regarding contingencies, guarantees, indemnifications and warranty liabilities.

Non-GAAP Financial Measures

We have reported our financial results in accordance with U.S. GAAP. In addition, we have discussed our results using non-GAAP measures.

Management believes that these non-GAAP financial measures provide an additional means of analyzing the current periods’ results against the corresponding prior periods’ results. However, these non-GAAP financial measures should be viewed in addition to, and not as a substitute for, the Company’s reported results prepared in accordance with U.S. GAAP. Our non-GAAP financial measures are not meant to be considered in isolation or as a substitute for comparable U.S. GAAP measures and should be read only in conjunction with our Combined and Condensed Combined Financial Statements prepared in accordance with U.S. GAAP. Our management regularly uses our supplemental non-GAAP financial measures internally to understand, manage and evaluate our business and make operating decisions. These non-GAAP measures are among the primary factors management uses in planning for and forecasting future periods. Compensation of our executives is based in part on the performance of our business based on these non-GAAP measures.

A reconciliation of these non-GAAP financial measures and the most directly comparable measures calculated and presented in accordance with U.S. GAAP are set forth on the following tables.

These reconciliations also include the income tax effects for our non-GAAP performance measures in total, to the extent applicable. The income tax effects are calculated under the same accounting principles as applied to our reported pre-tax performance measures under ASC 740, which employs an annual effective tax rate method. The noted income tax effect for our non-GAAP performance measures is effectively the difference in income taxes for reported and adjusted pre-tax income calculated under the annual effective tax rate method.

 

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Adjusted Earnings Measures

We adjust the following earnings measures:

 

    Net income

 

    Effective tax rate

In the six months ended June 30, 2016 and three years ended December 31, 2015, we adjusted for the amortization of intangible assets. The amortization of intangible assets is driven by our acquisition activity, which can vary in size, nature and timing as compared to other companies within our industry and from period to period. The use of intangible assets contributed to our revenues earned during the periods presented and will contribute to our future period revenues as well. Amortization of intangible assets will recur in future periods.

Adjusted Earnings Measures—Six Months ended June 30, 2016

In 2016, we revised our calculation of the above noted Adjusted Earnings Measures to exclude the following items in addition to the amortization of intangibles:

 

    Restructuring and related costs

 

    Separation costs

Restructuring and related costs: Restructuring and related costs include restructuring and asset impairment charges as well as costs associated with our strategic transformation program beyond those normally included in restructuring and asset impairment charges. Restructuring consists of costs primarily related to severance and benefits paid to employees pursuant to formal restructuring and workforce reduction plans. Asset impairment includes costs incurred for those assets sold, abandoned or made obsolete as a result of our restructuring actions, exiting from a business or other strategic business changes. Additional costs for our strategic transformation program are primarily related to the implementation of strategic actions and initiatives and include third-party professional service costs as well as one-time incremental costs. All of these costs can vary significantly in terms of amount and frequency based on the nature of the actions as well as the changing needs of the business. Accordingly, due to that significant variability, we exclude these charges since we do not believe they provide meaningful insight into our current or past operating performance nor do we believe they are reflective of our expected future operating expenses as such charges are expected to yield future benefits and savings with respect to our operational performance.

Separation costs: Separation costs are expenses incurred in connection with Xerox’s planned separation into two independent, publicly traded companies. Separation costs are primarily for third-party investment banking, accounting, legal, consulting and other similar types of services related to the separation transaction as well as costs associated with the operational separation of the two companies, such as those related to human resources, brand management, real estate and information management to the extent not capitalized. Separation costs include the costs associated with bonuses and restricted stock grants awarded to employees for retention through the separation as well as incremental income tax expense related to the Internal Transactions. These costs are incremental to normal operating charges and are being incurred solely as a result of the separation transaction. Accordingly, we exclude these expenses from our Adjusted Earnings Measures in order to evaluate our performance on a comparable basis.

The prior year measures will be revised accordingly to conform to the changes made in 2016.

Adjusted Earnings Measures—Years ended December 31, 2015, 2014 and 2013

Adjusted Revenue, Costs and Expenses and Margin

In 2015 in addition to the above noted Adjusted Earnings Measures, we adjusted revenue, costs and expenses and margin.

 

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As previously discussed, during the third quarter of 2015, we recorded a pre-tax HE charge of $389 million ($237 million after-tax), which included a $116 million reduction to revenues. See “—Overview—Recent Developments—Refocusing of Government Healthcare Business” for additional information. As a result of the significant impact of the HE charge on our reported revenues, costs and expenses as well as key metrics for the period, we discussed our 2015 results using non-GAAP measures that excluded the impact of the HE charge. In addition to the magnitude of the charge and its impact on our reported results, we excluded the HE charge due to the fact that it was primarily a unique charge associated with the determination, reached after a series of discussions, that fully completing our HE platform implementations in California and Montana was no longer considered probable.

Net Income and Effective Tax Rate

In addition to the exclusion of the HE charge, in 2015 the above noted Adjusted Earnings Measures (Net Income and Effective Tax Rate) were also adjusted for the following item:

Software impairment charge: The pre-tax software impairment charge in the second quarter of 2015 of $146 million ($89 million after-tax) is excluded due to its non-cash impact and the unique nature of the item both in terms of the amount and the fact that it was the result of a specific management action involving a change in strategy in our Government Healthcare business. See “—Overview—Recent Developments—Refocusing of Government Healthcare Business” for additional information.

Operating Income and Margin

We also calculate and utilize operating income and margin earnings measures by adjusting our pre-tax income and margin amounts to exclude certain items. In addition to the exclusion of the HE charge as well as the amortization of intangible assets, Restructuring and related costs and Separation costs discussed above, operating income and margin also excludes Related Party interest and Other expenses, net. Related Party interest includes net interest cost associated with our Related Party borrowings. Other expenses, net includes third-party interest expense and also includes certain other non-operating costs and expenses. We exclude these amounts in order to evaluate our current and past operating performance and to better understand the expected future trends in our business.

Constant Currency

Refer to “Currency Impact” for a discussion of this measure and its use in our analysis of revenue growth.

Net (Loss) Income reconciliation—Six Months ended June 30, 2016 and 2015:

 

     Six Months Ended June 30,  

(in millions)

     2016          2015    

Reported(1)

   $ (33    $ (109

Adjustments:

     

Amortization of intangible assets

     137         125   

Restructuring and related costs

     49         151   

Separation costs

     19         —     

Income tax adjustments(2)

     (66      (106
  

 

 

    

 

 

 

Adjusted

   $ 106       $ 61   
  

 

 

    

 

 

 

 

(1) Net loss from continuing operations.
(2) Refer to Effective Tax Rate reconciliation.

 

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Net Income reconciliation—Years ended December 31, 2015, 2014 and 2013:

 

     Year Ended December 31,  

(in millions)

   2015      2014      2013  

Reported(1)

   $ (336    $ 34       $ 135   

Adjustments(2):

        

Amortization of intangible assets

     153         153         147   

Software Impairment

     89         —           —     

HE Charge

     237         —           —     
  

 

 

    

 

 

    

 

 

 

Adjusted

   $ 143       $ 187       $ 282   
  

 

 

    

 

 

    

 

 

 

 

(1) Net (loss) income from continuing operations.
(2) Represents after-tax adjustments. Refer to “Effective Tax Rate reconciliation—Years ended December 31, 2015, 2014 and 2013” schedule that follows for the breakdown of each adjustment between pre-tax amount and income tax.

Effective Tax Rate reconciliation—Six Months ended June 30, 2016 and 2015:

 

     Six Months Ended
June 30, 2016
    Six Months Ended
June 30, 2015
 

(in millions)

   Pre-Tax
Loss
    Income Tax
(Benefit)
Expense(3)
    Effective
Tax
Rate
    Pre-Tax
Loss
    Income Tax
(Benefit)
Expense
    Effective
Tax Rate
 

Reported(1)

   $ (88   $ (55     62.5   $ (192   $ (83     43.2

Non-GAAP Adjustments(2)

     205        66          276        106     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted

   $ 117      $ 11        9.4   $ 84      $ 23        27.4
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Pre-Tax Loss and Income Tax Benefit from continuing operations.
(2) Refer to Net (Loss) Income reconciliation for details.
(3) The tax impact of Adjusted Pre-Tax Income from continuing operations is calculated under the same accounting principles applied to the As Reported Pre-Tax Income under ASC 740, which employs an annual effective tax rate method to the results.

Effective Tax Rate reconciliation—Years ended December 31, 2015, 2014 and 2013:

 

    Year Ended December 31,
2015
    Year Ended December 31,
2014
    Year Ended December 31,
2013
 

(in millions)

  Pre-Tax
(Loss)
Income
    Income Tax
(Benefit)
Expense
    Effective
Tax Rate
    Pre-Tax
Income
    Income Tax
(Benefit)
Expense
    Effective
Tax Rate
    Pre-Tax
Income
    Income Tax
Expense
    Effective
Tax Rate
 

Reported(1)

  $ (574   $ (238     41.5   $ 10      $ (24     (240.0 )%    $ 207      $ 72        34.8

Adjustments:

                 

Amortization of intangible assets

    250        97          250        97          240        93     

Software Impairment

    146        57          —          —            —          —       

HE Charge

    389        152          —          —            —          —       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted

  $ 211      $ 68        32.2   $ 260      $ 73        28.1   $ 447      $ 165        36.9
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Pre-tax (loss) income and income tax (benefit) expense from continuing operations.

 

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Operating Income / Margin reconciliation—Six Months ended June 30, 2016 and 2015:

 

     Six Months Ended June 30,
2016
           Six Months Ended June 30,
2015
        

(in millions)

       Loss             Revenue          Margin         Loss             Revenue          Margin  

Reported Pre-tax Loss(1)

   $ (88   $ 3,298         (2.7 )%    $ (192   $ 3,361         (5.7 )% 

Adjustments:

              

Amortization of intangible assets

     137             125        

Restructuring and related costs

     49             151        

Separation costs

     19             —          

Related party interest

     20             36        

Other expenses, net

     11             10        
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Adjusted Operating Income/Margin

   $ 148      $ 3,298         4.5   $ 130      $ 3,361         3.9
  

 

 

   

 

 

      

 

 

   

 

 

    

 

(1) Pre-Tax Loss and revenue from continuing operations.

Operating Income / Margin reconciliation—Years ended December 31, 2015, 2014 and 2013:

 

     Year Ended December 31,
2015
    Year Ended December 31,
2014
    Year Ended December 31,
2013
 

(in millions)

   Profit     Revenue      Margin     Profit      Revenue      Margin     Profit     Revenue      Margin  

Reported Pre-tax (Loss) Income(1)

   $ (574   $ 6,662         (8.6 )%    $ 10       $ 6,938         0.1   $ 207      $ 6,879         3.0

Adjustments:

                      

Amortization of intangible assets

     250             250              240        

Restructuring and asset impairment charges

     159             21              18        

HE Charge

     389        116           —           —             —          —        

Related party interest

     61             107              109        

Other expenses, net

     38             45              (36     
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Adjusted Operating Income / Margin

   $ 323      $ 6,778         4.8   $ 433       $ 6,938         6.2   $ 538      $ 6,879         7.8
  

 

 

   

 

 

      

 

 

    

 

 

      

 

 

   

 

 

    

 

(1) (Loss) profit and revenue from continuing operations.

The following non-GAAP reconciliation tables adjust for the HE charge in the third quarter of 2015, which does not impact the years ended December 31, 2014 or 2013 or the six months ended June 30, 2016 or 2015.

Other Segment Revenue / Margin reconciliation:

 

     Year Ended December 31, 2015  

(in millions)

   Reported(1)      HE Charge      Adjusted  

Revenue

   $ 289       $ 116       $ 405   

Segment (Loss)

     (489      389         (100

Segment Margin

     NM            (24.7 )% 

 

(1) Revenue from continuing operations.

 

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Key Financial Ratios reconciliation:

 

     Year Ended December 31, 2015  
     Gross
Margin
    R&D     as
% of
Revenue
    SAG     as
% of
Revenue
 

Reported(1)

     10.3     0.8     10.5

Adjustment:

      

HE Charge

     5.5        —          (0.2
  

 

 

   

 

 

   

 

 

 

Adjusted

     15.8     0.8     10.3
  

 

 

   

 

 

   

 

 

 

 

(1) Revenue from continuing operations.

MARKET RISK

We are exposed to market risk from foreign currency exchange rates, which could affect operating results, financial position and cash flows. We manage our exposure to this market risk through our regular operating and financing activities and, when appropriate, through the use of derivative financial instruments. We utilize derivative financial instruments to hedge economic exposures, as well as reduce earnings and cash flow volatility resulting from shifts in market rates.

Recent market events have not caused us to materially modify or change our financial risk management strategies with respect to our exposure to foreign currency risk. Refer to Note 11—Financial Instruments in the Combined Financial Statements for additional discussion on our financial risk management.

Foreign Exchange Risk

Assuming a 10% appreciation or depreciation in foreign currency exchange rates from the quoted foreign currency exchange rates at December 31, 2015, the potential change in the fair value of foreign currency-denominated assets and liabilities in each entity would not be significant because all material currency asset and liability exposures were economically hedged as of December 31, 2015. A 10% appreciation or depreciation of the U.S. Dollar against all currencies from the quoted foreign currency exchange rates at December 31, 2015 would have an impact on our cumulative translation adjustment portion of equity of approximately $60 million. The net amount invested in foreign subsidiaries and affiliates, primarily in the U.K. and Europe, and translated into U.S. Dollars using the year-end exchange rates, was approximately $600 million at December 31, 2015.

 

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MANAGEMENT

The following table presents information, as of October 31, 2016, concerning our directors and executive officers following the Spin-Off, including a five-year employment history and any directorships held by our directors in public companies.

 

Name

   Age     

Position with Conduent

Mr. Ashok Vemuri

     48       Director and Chief Executive Officer

Mr. Vincent J. Intrieri

     60       Director

Mr. Courtney Mather

     40       Director

Mr. Michael Nevin

     33       Director

Mr. Michael A. Nutter

     59       Director

Mr. William G. Parrett

     71       Director

Ms. Virginia M. Wilson

     62       Director

Mr. Jay Chu

     58       Chief Accounting Officer

Mr. Frederick S. Koury

     55       Chief Human Resources Officer

Mr. James Michael Peffer

     55       Vice President, General Counsel and Secretary

Mr. Brian J. Webb-Walsh

     41       Vice President and Chief Financial Officer

Mr. Ashok Vemuri

Mr. Vemuri has served as Chief Executive Officer of Xerox Business Services, LLC and an Executive Vice President of Xerox Corporation since July 2016. Mr. Vemuri previously was President, Chief Executive Officer and a member of the Board of Directors of IGATE Corporation, a New Jersey-based global technology and services company now part of global technology and outsourcing company Capgemini. Before joining IGATE, Mr. Vemuri spent 14 years at Infosys Limited, a multinational consulting and IT services company, in a variety of leadership and business development roles, including Member of the Executive Council, Head of Americas, Global Head of Financial Services from 2003 to 2012 and Global Head of Manufacturing and Engineering Services from 2012 to 2013. Mr. Vemuri was a member of the Board of Directors of Infosys from 2011 to 2013. Prior to joining Infosys in 1999, Mr. Vemuri worked in the investment banking industry at Deutsche Bank and Bank of America. Mr. Vemuri brings to the Board unique operational, financial and client experience and a proven track record of leading growth and corporate transformations through his leadership positions with IGATE and Infosys.

Mr. Vincent J. Intrieri

Mr. Intrieri has served as Senior Managing Director of Icahn Capital LP, the entity through which Carl C. Icahn manages private investment funds, since January 2008. In addition, since November 2004, Mr. Intrieri has been a Senior Managing Director of Icahn Onshore LP, the general partner of Icahn Partners LP, and Icahn Offshore LP, the general partner of Icahn Partners Master Fund LP, entities through which Mr. Icahn invests in securities.

Mr. Intrieri has been a director of: Ferrous Resources Limited, an iron ore mining company with operations in Brazil, since 2015; Hertz Global Holdings, Inc., a company engaged in the car rental business, since 2014; Transocean Ltd., a provider of offshore contract drilling services for oil and gas wells, since 2014; and Navistar International Corporation, a truck and engine manufacturer, since 2012. Mr. Intrieri was previously: a director of Chesapeake Energy Corporation, an oil and gas exploration and production company, from 2012 to 2016; a director of CVR Refining, LP, an independent downstream energy limited partnership, from 2012 to 2014; a director of Forest Laboratories, Inc., a supplier of pharmaceutical products, from 2013 to 2014; a director of CVR Energy, Inc., a diversified holding company primarily engaged in the petroleum refining and nitrogen fertilizer manufacturing industries, from 2012 to 2014; a director of Federal-Mogul Holdings Corporation, a supplier of automotive powertrain and safety components, from 2007 to 2013; a director of Icahn Enterprises L.P., a diversified holding company engaged in a variety of businesses, including investment, automotive, energy, gaming, railcar, food packaging, metals, real estate and home fashion, from 2006 to 2012, and was Senior Vice

 

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President of Icahn Enterprises L.P. from 2011 to 2012; a director of Dynegy Inc., a company primarily engaged in the production and sale of electric energy, capacity and ancillary services, from 2011 to 2012; Chairman of the Board and a director of PSC Metals Inc., a metal recycling company, from 2007 to 2012; a director of Motorola Solutions, Inc., a provider of communication products and services, from 2011 to 2012; a director of XO Holdings, a competitive provider of telecom services, from 2006 to 2011; a director of National Energy Group, Inc., a company that was engaged in the business of managing the exploration, production and operations of natural gas and oil properties, from 2006 to 2011; a director of American Railcar Industries, Inc., a railcar manufacturing company, from 2005 until 2011, and was a Senior Vice President, the Treasurer and the Secretary of American Railcar Industries from March 2005 to December 2005; a director of WestPoint Home LLC, a home textiles manufacturer, from 2005 to 2011; and Chairman of the Board and a director of Viskase Companies, Inc., a meat casing company, from 2003 to 2011. Ferrous Resources Limited, CVR Refining, CVR Energy, Federal-Mogul, Icahn Enterprises, PSC Metals, XO Holdings, National Energy Group, American Railcar Industries, WestPoint Home and Viskase Companies each are or previously were indirectly controlled by Carl C. Icahn. Mr. Icahn also has or previously had non-controlling interests in Hertz, Transocean, Forest Laboratories, Navistar, Chesapeake Energy, Dynegy and Motorola Solutions. Mr. Intrieri is a director selected by the Icahn Group pursuant to the Icahn Agreement. Mr. Intrieri brings to the Board financial expertise and extensive experience providing strategic advice and guidance to companies from his service as a director on various public company boards.

Mr. Courtney Mather

Mr. Mather has served as a Managing Director of Icahn Capital LP, the entity through which Carl C. Icahn manages investment funds, since 2014. Prior to joining Icahn Capital, Mr. Mather was at Goldman Sachs & Co from 1998 to 2012, most recently as Managing Director responsible for Private Distressed Trading and Investing.

Mr. Mather has been a director of: Herc Holdings Inc., an international provider of equipment rental and services, since June 2016; Trump Entertainment Resorts, Inc., a company engaged in the business of owning and operating casinos and resorts, since February 2016; Freeport-McMoRan Inc., the world’s largest publicly traded copper producer, since 2015; Ferrous Resources Limited, an iron ore mining company with operations in Brazil, since 2015; and Federal-Mogul Holdings Corporation, a supplier of automotive powertrain and safety components, since 2015. Mr. Mather was previously a director of: Viskase Companies Inc., a meat casing company, from 2015 to 2016; American Railcar Industries, Inc, a railcar manufacturing company, from 2014 to 2016; CVR Refining, LP, an independent downstream energy limited partnership, from 2014 to 2016; and CVR Energy, Inc., a diversified holding company primarily engaged in the petroleum refining and nitrogen fertilizer manufacturing industries, from 2014 to 2016. Trump Entertainment, Ferrous Resources Limited, Federal-Mogul, American Railcar Industries, CVR Refining, CVR Energy and Viskase are each indirectly controlled by Carl C. Icahn. Mr. Icahn also has a non-controlling interest in each of Herc Holdings and Freeport-McMoRan through the ownership of securities. Mr. Mather is a director selected by the Icahn Group pursuant to the Icahn Agreement. Mr. Mather brings to the Board significant experience in finance and experience providing strategic advice and guidance to companies through his service as a director on various public company boards.

Mr. Michael Nevin

Mr. Nevin has been employed as a Financial Analyst at Icahn Enterprises L.P., a diversified holding company engaged in a variety of businesses, including investment, automotive, energy, gaming, railcar, food packaging, metals, mining, real estate and home fashion, since July 2015. Prior to that time, Mr. Nevin was employed by Jefferies LLC as a Research Analyst from 2014 to 2015 covering the Utilities sector. Mr. Nevin was also employed by JP Morgan Investment Bank in various roles from 2009 to 2015.

Mr. Nevin has been a director of Federal-Mogul Holdings Corporation, a supplier of automotive powertrain and safety components, since February 2016. Federal-Mogul is indirectly controlled by Carl C. Icahn. Mr. Nevin is a director selected by the Icahn Group pursuant to the Icahn Agreement. Mr. Nevin bring